How to invest in IPOs ?

26.08.2020

IPO means Initial Public Offering and is the IPO of a company. On german, this is called the procedere stock drawing. Shares can only be subscribed if you have a deposit with a syndicate bank. 

Stock drawing is a different type of order. Just like a normal purchase of securities, this subscription order can be provided with a certain quantity and also a limit price. The fees for such an order are usually the same as in the case of a regular purchase of securities.

Normally, the subscription requires a minimum number of shares, about 20 shares, of the company that goes public. A drawing can only be submitted within the rather short subscription period. This period is usually between five days and two weeks.

The price at which the investor receives the paper is determined during this bookbuilding phase, through supply and demand. Previously, however, the banks in the issue consortium had already determined a price range or bookbuilding range. If the demand for a share is high, an issue price is determined accordingly at the upper end of the range, with less interest on the investor side, the issue price is correspondingly lower. If the demand is so high that the securities are already oversubscribed (more demand than supply), the subscription period can also be terminated prematurely.

Supply and demand.

However, whether the investor gets his signature at all with his broker also depends on the demand. In a title that was highly coveted in advance, the drawing resembles a lottery game. Those who really receive shares can assume that they will win subscriptions. This means that the stock starts trading well above the issue price.

However, the chances of an allocation also depend on which broker or bank is placed with a subscription order. Guaranteed quotas for investors are usually only available at banks and their online brokers if the institution was part of the banking consortium at the IPO. How many of the shares actually received by each investor depends on the distribution according to the rules of the banks themselves. In any case, a "full allocation" in the event of high demand is by no means guaranteed.

Grey Market.

If you want to buy an attractive stock before the actual IPO, for example because you expect rapid price increases after the launch, you can do so to a limited extent in trading on appearances. In this grey market, the shares are already traded in advance. Exactly that is a forward transaction. In doing so, the offering of the share undertakes to deliver it at the corresponding price after the IPO, the investor undertakes to pay the purchase price after the IPO has taken place.

If you have not been successful in drawing a new share, nor if you want to strike at the time of trading, you can also buy the stock after the IPO on the stock exchange or in direct trading.