how to buy IPO as soon as it's available

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FunTimes
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how to buy IPO as soon as it's available

Post by FunTimes »

A company I like is going to have an IPO and I'd like to buy some shares as soon as they become available. How can I do this with Vanguard? Do I need to monitor the news, wait for it to be available, and then quickly purchase like any other stock? Is there a better way?
sureshoe
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Re: how to buy IPO as soon as it's available

Post by sureshoe »

You can either buy it immediately after it comes on the market, or you can be invited to buy shares prior to the offering (which are usually padded for some upside).

For example, if a company is going public, the IPO price might be $20/share. Only select people can buy there - employees of the company and people with an inside track at brokerage/etc. I'm sure some people on here will share how they did that.

On IPO day, they match up, let's say 5%-10% of the float to buyers so it doesn't jump all around. It might go up to $25/share, or possibly go down. Then it becomes publicly available. You never got a shot at the $20/share, but you can get it once the market is set.

So in short, unless you're an employee with select access (and even that is limited) or have access to a broker that gives you buying opportunities, it's limited.
Last edited by sureshoe on Thu Sep 16, 2021 2:16 pm, edited 1 time in total.
alex_686
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Re: how to buy IPO as soon as it's available

Post by alex_686 »

You can't and this is probably a poor idea.

Let us ignore that investing in the early days of a IPO is risk and has a poor track record.

Generally speaking, IPO shares are offered by the underwriters and their sub-underwriters to their clients. These tend to be big full service investment banks, not Vanguard. Because IPO - while high risk - is essentially free money there is a great demand for those shares. It tends to go to favored clients.

You can buy them in the secondary market after they go public. You can watch the news. An announcement will be made with the date. The problem is that the market is bonkers for the first few weeks. Generally speaking it starts at the IPO price, shoots sky high, then down, then back up. Figuring out when to buy is tricky. I was at such a firm during the dot.com boom. Because of the initial spike clients were still underwater after the stock had made reasonable gains.

Unless you know what you are doing wait. There may be regret that you did not get it at a low point, but this is hindsight talking. It is almost impossible to time it so you get it at a low point.
Last edited by alex_686 on Thu Sep 16, 2021 2:16 pm, edited 1 time in total.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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arcticpineapplecorp.
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Re: how to buy IPO as soon as it's available

Post by arcticpineapplecorp. »

best way is to be an insider who gets shares before they go public then dump them on the uninitiated public at a premium. that's how it normally works.

otherwise just place an order to buy as soon as it becomes available at your favorite brokerage house.

typically IPOs make lousy investments that's why insiders dump them on the public.

Read the Larry Swedroe Book "Rational Investing in Irrational Times". You may be making mistake 51 "Do You Chase the IPO Dream?"

In this chapter Larry goes through all the evidence that picking an IPO is the winning strategy...for the underwriters on Wall Street who generate great fee income and insiders who sell their shares on unwitting retail investors. The retail investors (OP) are buying lottery tickets.

The evidence of underperformance? Paraphrasing from Larry's Book:

Journal of Finance 1995. Study covering 1970-1990 looked at returns from buying every IPO at the end of the first day's closing price and holding for 5 years. The return was just 5% per year and it was 7% LESS than a benchmark of companies of similar market cap.

Wall Street Journal Feb 24, 1999. U. of Florida prof. Jay Ritter looked at 1006 IPOs that raised $20 mil 1988-1993. The median IPO underperformed the Russell 3000 by 30% 3 years after going public and 46% of IPOs produced negative returns.

Fortune Nov 23, 1998. How did IPOs issued in 1993 do through 1998? The average IPO returned 1/3rd as much as the S&P500 index. 1/2 traded below the offering price. 1/3rd were down over 50%.

Wall Street Journal March 30, 1999. U.S. Bancorp Pier Jaffray study looked at May 1988 - July 1998 (4900 IPOs). The outcome? Less than 1/3rd were above the IPO price, 1/3rd weren't even trading anymore due to bankruptcy, or were acquired or no longer trading in an active market.

And on and on for another four pages. The persistent underperformance continues.

Larry writes:
In the face of this poor performance, why do investors continue to chase the latest IPO? There are two explanations for this seemingly irrational behavior. FIrst, unless an investor happens to read scholarly publications such as the Journal of Finance, he or she is unlikely to be aware of the facts. Second, even when informed, investors often act in what appear to be irrational ways .In this case, it is another example of the triumph of hope over experience. Investors seem to be willing to accept the high probability of low returns in exchange for the small chance of a home run or, possibly even more important, a great story to tell at the next cocktail party.

There is an old saying in sports that sometimes the best trades are the ones you don't make. You can avoid the mistake of investing in IPOs by remembering that while IPOs have provided huge profits for the Wall Street firms that market them, they have generated very poor returns for investors.
didn't answer your question, but had to be said nonetheless.
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Topic Author
FunTimes
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Re: how to buy IPO as soon as it's available

Post by FunTimes »

Thanks for the insight into how buying IPO shares works. Also interesting is how often it's a bad idea! Thanks for that.

I like to put "play" money into companies that make products I like. I've wanted to invest in this company for a long time (it's Volvo, BTW), so now I thought that I would once it's possible. Maybe doing so would just end up being the same as the unwitting public trying to get in on a big win.
alex_686
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Re: how to buy IPO as soon as it's available

Post by alex_686 »

This listing may not be as crazy or risky as a trinational IPO. We have a well established company with, I assume, a decent history of earnings, etc.

Still, there is no need to run out and buy it on day 1.

You are back to investing in individual stocks, with all the risk that entails. Have you read through the prospectus and annual reports yet?
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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arcticpineapplecorp.
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Re: how to buy IPO as soon as it's available

Post by arcticpineapplecorp. »

FunTimes wrote: Thu Sep 16, 2021 2:25 pm Thanks for the insight into how buying IPO shares works. Also interesting is how often it's a bad idea! Thanks for that.

I like to put "play" money into companies that make products I like. I've wanted to invest in this company for a long time (it's Volvo, BTW), so now I thought that I would once it's possible. Maybe doing so would just end up being the same as the unwitting public trying to get in on a big win.
just because a company makes a product you like doesn't tell you anything about how they run their business.

sure they got your product to market at a cost you were willing to pay for, but you know nothing about the level of debt they took on to do that, nor whether the company is (or ever will be) profitable or not. There are things that only show on the balance sheet and if you don't understand that you can buy a stock that loses value or even goes to $0. poof there goes your money.

also, you're taking concentrated risk which may not be compensated. The beauty of just owning the market is you diversify all risks that are generally not compensated and only take on the risk for which you're likely to be compensated, i.e., market risk.

why take risk you don't have to, unless you like gambling.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
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FunTimes
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Re: how to buy IPO as soon as it's available

Post by FunTimes »

Welp, the IPO happened. I don't seem to be able to buy Volvo Cars (VOLCARB I think) through Vanguard. Will I be able to later? If I need to use something else to buy it, what should I use?
arcticpineapplecorp. wrote: Thu Sep 16, 2021 3:39 pm just because a company makes a product you like doesn't tell you anything about how they run their business.
True. This is just play money though, I don't mind gambling a tiny bit on brands I like.
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arcticpineapplecorp.
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Re: how to buy IPO as soon as it's available

Post by arcticpineapplecorp. »

FunTimes wrote: Sun Oct 31, 2021 5:28 pm Welp, the IPO happened. I don't seem to be able to buy Volvo Cars (VOLCARB I think) through Vanguard. Will I be able to later? If I need to use something else to buy it, what should I use?
arcticpineapplecorp. wrote: Thu Sep 16, 2021 3:39 pm just because a company makes a product you like doesn't tell you anything about how they run their business.
True. This is just play money though, I don't mind gambling a tiny bit on brands I like.
funny thing is you don't have to gamble because if you own the market, you get to own all the brands you like.
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FunTimes
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Re: how to buy IPO as soon as it's available

Post by FunTimes »

Aye, and I also get Apple, which I hate. ;)

I get it and I have 95% of my investments in total market funds. I just want to buy some Volvo Cars stock and would like to know the best way to do that.
LookinAround
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Re: how to buy IPO as soon as it's available

Post by LookinAround »

Article includes brokers you can use to buy it
https://marketrealist.com/p/volvo-ipo-s ... uld-i-buy/
Boglegrappler
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Re: how to buy IPO as soon as it's available

Post by Boglegrappler »

There is a fair amount of misperception above.

When a company files to go public, there are already some shareholders who invested in the company as venture capitalists, or as founders, or who have received shares as part of their compensation. If any of these holders are selling, it is disclosed directly in the prospectus, and the front page will show two sets of numbers for proceeds to the company (from selling newly issued shares), and proceeds to selling shareholders (if there are any). If there are no selling shareholders, or even if there are, the preexisting shareholders are normally subject to "lockup" agreements, where they cannot sell their shares in the regular market for some period of time---typically many weeks. This includes shares retained by the shareholders who are selling some in the offering. Also, even after the lock-up agreement expires, a true insider who is a control person under the securities laws cannot just call his broker and sell a lump. There are a lot of restrictive rules.

When an offering is announced, if your brokerage firm is part of the selling group, you may ask your representative for an allocation of shares. At some firms--Fidelity, for instance--this is done online, and you give an a of interest and how many shares you would like. If the IPO is "hot" with a lot of interest, your broker may not receive many shares, and they may not allocate any of them to you to fill your request. If they do allocate any, it may be only a fraction of what you asked to receive. These allocations are made based on your importance as a customer. There is an online calendar of upcoming IPOs.

If you don't receive any shares in the actual offering, you can buy in the market as the shares open for trading. This has some serious risk. If you enter a market order, you may pay a great deal above the IPO price. If you enter a limit order, your order may not be filled.

I've bought a couple of IPOs over the past several years. I was cut way back from my request in Ali Baba, and in Airbnb, but received close to what I requested in a less "hot" IPO last year. Alibaba traded down past the IPO price for a while, so anyone could have bought there and there was no advantage to getting shares in the offering. I still own it, but don't have a meaningful amount. I sold airbnb after a couple of months because it was such a small amount, and also sold the other stock at a small premium, and before it lost half its value following some bad forecasts. If you sell an allocation that you bought on the initial offering (not in the aftermarket) and you do it too quickly after the offering, your broker will put you on a list, and if you do it again you'll be banned from receiving IPO allocations because you are a "flipper". Fidelity has a rule about how long you have to hold to avoid this label, but I think it is a month or two.

I generally agree that IPOs have a lot of risk for the average investor. You're probably best off to avoid them. The ones that are going to get a big "pop" in valuation on the first day of trading are likely not available to you unless you are a substantial customer. The ones that you will be able to get a decent allocation of will be ones that are not in demand by institutions.

Good luck.


EDIT: Looks like the Volvo offering has already happened as a European offering.

https://www.reuters.com/business/autos- ... 021-10-29/
Valuethinker
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Re: how to buy IPO as soon as it's available

Post by Valuethinker »

alex_686 wrote: Thu Sep 16, 2021 2:15 pm
You can buy them in the secondary market after they go public. You can watch the news. An announcement will be made with the date. The problem is that the market is bonkers for the first few weeks. Generally speaking it starts at the IPO price, shoots sky high, then down, then back up. Figuring out when to buy is tricky. I was at such a firm during the dot.com boom. Because of the initial spike clients were still underwater after the stock had made reasonable gains.
What Alex is alluding to, I think, is the "SEC Green Shoe" (because the first time it was used it was with the Green Shoe Manufacturing Company of New England).

Essentially the underwriter (the investment bank consortium which buys the stock from the company (or its existing shareholders) and sells it on to investors, is allowed to legally manipulate the price for up to 30 (?) days.

(so the company sells shares to the underwriters, who in turn sell them on to institutional investors in the IPO).

The way they do this is they artificially withhold up to 15% of the issue. So say the company wants to sell 100 shares in an IPO. The underwriting agreement allows it to sell 85 shares (at a price agreed the night before go live/ first day of trading). If orders for more than 85 shares are received, then the investment banks can ask the company to issue up to 15 more shares to meet that demand. Conversely, if demand is say for 82 shares, then the underwriting syndicate is left with 3 shares, but the aftermarket is better because only 85 shares were issued (not 100). (the percentages don't quite work out in my example).

The privileged investors who got in on the IPO price often sell into the rising market - pocketing an instant profit. That pushes the price back down.

You tend to make money on IPOs, if you do, on highly successful companies at times when IPOs are relatively few. That's more or less what happened with Microsoft and Apple during the mid 1980s, I think (it was a time of tech bubble bust). And Google (during the tail end of the tech bubble, and Google tried to avoid the "rigged market" that the "bulge bracket" investment banks run on IPOs (their fees typically amount to c 7% of new money raised, far more than they make in ordinary stock trading)-- which didn't work & gave Google a lousy aftermarket. Facebook had a number of funnies in its IPO - Morgan Stanley had downgraded their forecasts for FB on mobile, but this was not public knowledge, but some existing investors knew. Issuing into a downgrade on earnings forecasts is not a good way to start your IPO.

Jetblue was another example of a very hot IPO (about 2004?). I am not sure exactly what happened after that - but it was an IPO that *everyone* wanted a piece of - not just institutional investors, but the friends and family of Wall Streeters, etc. There's a Harvard Business School case about it.

These opportunities are few and far between. Most of the time, if you cannot get in at the IPO price, the first day closing price has fully reflected, or more, the underlying value of the company. From there, they tend to underperform.

EDIT: if the company's main source of operations or headquarters is outside the USA then you have to think carefully about why it is being offered to US investors. If it is a technology company, that's a no brainer - the best tech companies (mostly) are listed in USA, the best equity analyst coverage is there, most successful tech companies have huge operations in America, etc. For other types of companies, the case may not be so clear. And there are additional levels of compliance cost associated with having a US listing -- the requirements can be onerous, particularly for smaller companies.

Put it another way, the world's institutional investors are totally global. It's not a big problem for Blackrock Portfolio Managers, say, if they like a stock, to have it put in European stock portfolios rather than American ones.

Volvo is a European car company, and owned by a Chinese company? So why list in USA, which is not a large market for its cars. Does it even manufacture there?
anoop
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Re: how to buy IPO as soon as it's available

Post by anoop »

Valuethinker wrote: Mon Nov 01, 2021 10:26 am Volvo is a European car company, and owned by a Chinese company? So why list in USA, which is not a large market for its cars. Does it even manufacture there?
They have a factory in SC that makes the S60.
Boglegrappler
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Re: how to buy IPO as soon as it's available

Post by Boglegrappler »

These explanations get a bit deep into the weeds, but that is ok, if you're going to be messing around with IPOs.

The "green shoe" arrangement is part of the underwriting agreement between the investment banks and the company. The banks have the right to buy from the company an additional 15% more shares above what the company wanted to sell. This right is exercised at the closing (if the underwriters choose to do so.)

In allocating the stock, the investment banks seek to have an order book that is greater than the shares the company wants to sell, by about 15% or so. This way, they are "short" the stock by that amount. In a "hot deal", the bankers and company may price at the high end of the announced range, or they may raise the range (although this is usually done before the pricing date) The offering is priced after the market closes on the IPO date, and trading in the aftermarket will commence the next morning when the stock opens. The banking syndicate will enter a bid with the specialist to "stabilize" the stock which is usually at or just barely below the offering price.

So, if the ipo was in high demand, and there are enough aftermarket buyers to absorb the stock from "flippers", the stock trades up, and the underwriting syndicate doesn't buy any shares with their stabilizing bid at the offering price. So when closing occurs with the company several days later, they exercise the green shoe option and the company covers the underwriters' short position by issuing the additional shares to the underwriter.

If the offering wasn't so hot, the syndicate bid may buy up a fair amount of stock. When that happens, the underwriters don't exercise the green shoe option, since they've already covered their short position while "stabilizing" the stock.

When google went public, they didn't do a normal underwriting , but instead did a dutch auction.

From a history standpoint, its worth noting that the number of IPOs over the past several years is a big departure from certain times in the past. In the early to mid 70's through late 1982 there was a dearth of IPOs because there was no market for them. Apple, Microsoft, Nike, Fedex and a couple of others were the only IPOs to raise above $50 million. From August of '82, when the Fed made surprise cuts in interst rates from the mid teens, things changed.

Going back to the original question about how to participate, Fidelity has a tutorial area that explains their process, and I expect that other brokers do as well.
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