Initial Public Offering
A private company must restrict its investors to a specific group, including its founders, employees and a group known as friends and family, and therefore has limited access to capital. When a private company goes public, it makes shares of stock in the company available for purchase to additional investors through an initial public offering (IPO). Although there are many motives for engaging in an IPO, many companies do so to raise additional capital to expand their businesses or create liquidity for their stockholders. Unlike a loan, a company is not required to pay shareholders back for their investment.
To do an IPO, a corporation works with an underwriting firm, usually an investment bank, which typically buys shares from the company at a set price and then resells them to the public through affiliated brokerage firms. The underwriter charges a fee, which is usually a percentage of the cost of each share. If the IPO is successful, the underwriter realizes a profit and the company has the cash it needs to grow.
Typically, an average investor will not be able to purchase shares in an IPO until they hit the secondary market. Once the stock begins trading in the secondary market, it is no longer an IPO.
Trading IPOs at Scottrade
Scottrade offers clients the capability of purchasing shares of stock in the secondary market after the initial public offering (IPO). It is important to understand that Scottrade does not participate in IPOs. You are not purchasing shares directly from the issuer at the IPO price; you are purchasing these newly issued shares once they begin trading in the secondary market.
On the morning of the day the stock begins trading in the secondary market, you will be able to place only limit orders and stop-on-quote limit orders online. Then, when the primary exchange officially opens the symbol for trading, you will be able to place most other order types online. Please note that you must have the necessary funds for the purchase amount posted in your account prior to placing an online order.
Trading Newly Issued Securities on Margin
You may place trades in your margin account on the first day of trading; the house maintenance requirement on the first day is 50 percent. Listed and NASDAQ securities are typically marginable the second day of trading with a 50 percent minimum maintenance requirement for the next 30 days.
Short Selling Newly Issued Securities
You may place sell short orders the second day of trading; however, in most instances, shares won't typically be available for shorting until the fourth day of trading.
IPOs may not be appropriate for every investor. Clients should read the offering prospectus carefully, and make their own determination of whether an investment in the offering is consistent with their investment objectives, financial situation, and risk tolerance.
Articles, commentary, and opinions expressed on this site are those of the author and not necessarily those of Scottrade. Scottrade does not guarantee the accuracy of, or endorse, the views or opinions of the author.
The examples and/or strategies described in this blog are for informational purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.