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How to Get In On the Ground Floor of Newly Public Companies

Want to get in on the 2020 IPO action? Here’s what you need to know.

2020 has been an incredibly active year for IPOs. In the past few months alone, we’ve seen highly anticipated IPOs such as Snowflake (NYSE:SNOW), Rocket Companies (NYSE:RKT), and Palantir Technologies (NYSE:PLTR), plus dozens more.

However, actually investing in IPOs can be confusing, especially for newer investors. If a company that you want to invest in plans to go public, here’s what you need to know.

What kind of IPO is it?

The most important thing to know when a company you want to invest in goes public is what type of public offering it is.

Until a few years ago, virtually every company went public in the same basic way. They would file an initial registration statement with the Securities and Exchange Commission and hire one or more investment banks to underwrite an initial public offering, or IPO. The company would decide how many new shares to sell and price the IPO. Interested investors would commit a certain amount of capital and receive shares, and the stock would then begin trading on the public markets.

While this is still how the majority of companies go public, it isn’t the only way. There are three types of public offerings you might encounter, and the methods for investing in each type are very different.

Traditional IPOs

This is the process described in the last section. Unless your broker is an IPO participant, you might be out of luck as far as buying shares at the IPO price. As an example, my brokerage account is with TD Ameritrade. There have only been a handful of IPOs available through that platform in recent months, and none of the major IPOs was among them. Even if your broker does participate, they might restrict IPO investing to certain customers, such as those with account balances over a certain threshold.

Many investors maintain brokerage accounts with two or more firms to give themselves access to more IPOs. Still, unless your broker gives you access, you’ll have to wait until the stock starts trading on the public markets, which typically doesn’t happen until a few hours into‚Ķ

Matthew Frankel, CFP

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