What are IPO stocks and the best brokers for access?

Many investors dream of getting in early on the next Amazon. That's part of the appeal of initial public offerings, or IPOs, which allow investors to buy shares of a company as it enters the public market. With growing interest in potential future IPOs from companies such as SpaceX, Anthropic and OpenAI, here's what investors should know.

An IPO is the process where a private company becomes publicly traded by offering shares to investors. Once the IPO is complete, the company's stock begins trading on a public exchange such as the New York Stock Exchange (NYSE) or Nasdaq.

Companies typically go public to raise capital that can be used to fund growth, pay down debt or support other business goals. An IPO can also provide liquidity for early investors, founders and employees by allowing them to eventually sell some of their shares.

Before trading begins, the company and its underwriters set an IPO price for the shares being offered. After the stock starts trading, its market price can rise or fall based on investor demand, company performance and just overall market conditions.

There are generally two ways to invest in an IPO: purchasing shares before trading begins or buying the stock once it's publicly traded.

Before trading begins

Some investors can participate in an IPO before a stock starts trading on a public exchange.

This is when shares are offered at the IPO price to institutional investors, such as mutual funds, hedge funds and pension funds, as well as a limited number of retail investors through participating brokerages. These brokerages work with the investment banks underwriting the IPO and receive a limited allocation of shares. According to Fidelity, roughly 90% of IPO shares are typically allocated to institutional investors, while only about 10% go to individual investors. It's worth noting, however, that IPO allocations vary by deal and this 90/10 split certainly isn't always the case. Interested investors may also need to meet certain eligibility requirements to participate.

Even if your brokerage offers IPO access, receiving shares isn't guaranteed. To participate, you'll typically need to submit an indication of interest (IOI), which is a nonbinding request that indicates how many shares you'd like to purchase at the IPO price. The brokerage determines whether or not you receive shares and, if so, how many. In high-profile IPOs, demand can exceed the number of shares available, which means you may receive only a portion of the shares you requested, or none at all.

Once the stock is publicly traded

While not everyone can buy shares at the IPO price, virtually anyone with a brokerage account (like those below) can invest once a stock begins trading on a public exchange.

On IPO day, shares start trading on the open market, and investors can buy and sell them through their brokerage just like they would with any other publicly traded stock.

A key difference between the before- and after-trading phases is pricing. The IPO price, also known as the offer price, is set before trading begins, while the after-trading market price is determined in real time by supply and demand. For example, if a company prices its IPO at $50 per share, eligible investors who receive allocations may buy at that price. But once trading begins, the stock could open higher or lower depending on investor demand.

Brokerages that offer access to IPOs may have eligibility requirements that investors must meet before participating. Availability can vary by firm and by offering, so it's important to confirm details directly with your brokerage. In some cases, the Financial Industry Regulatory Authority (FINRA) has additional regulatory restrictions that may also apply.

Once a company begins trading publicly, these same brokerages can also be used to buy and sell shares on the open market like any other stock.

SoFi offers access to IPOs before they're public. Any SoFi member with an Active Investing account is eligible to participate and there are no minimums. SoFi considers the number of shares you're requesting to purchase and your total SoFi account value when deciding how to divvy up the available shares among its members. SoFi Plus members get preferred IPO access.

Robinhood's "IPO Access" randomly allocates shares to eligible brokerage customers and no fees are added; selected customers just pay for the shares they are allocated at the IPO price. Accounts not allowed to participate in IPOs via Robinhood include retirement accounts, joint accounts and managed accounts.

In order to qualify to request to participate in an IPO, Fidelity customers must have at least $100,000 in retail assets to participate in traditional IPOs or at least $500,000 for IPOs through underwriter relationships, or they're a part of the Fidelity Private Client Group^®.

Charles Schwab also offers IPO access to eligible investors, as well as E-Trade to eligible clients who have an individual account, joint account or IRA. Who exactly gets shares from E-Trade is largely determined by supply and demand.

IPOs can be exciting investment opportunities, but they also come with significant risks. Newly public companies tend to generate a lot of media attention and hype, which often leads to sharp price swings and more volatility. It's important than investors focus on their long-term investment strategy.

Investors who receive IPO allocations through a brokerage may also face restrictions on selling their shares. Selling IPO shares shortly after purchase is called "flipping," and many brokerages prohibit it.

Company insiders and early investors are typically subject to lock-up periods, usually lasting 90 to 180 days, during which they cannot sell their shares. There's also no guarantee that an IPO will be successful. Some stocks surge on their first day of trading, while others fall below their IPO price and never recover.

Before investing, consider whether committing money to an IPO aligns with your broader financial goals. If your IOI is accepted, you'll need cash available to complete the purchase. It's also wise to view the company's prospectus, or S-1 filing, which outlines the actual business, its financial performance and key risks.

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