How to Buy IPO Stock

Buy IPO

To buy IPO stock is a much debated and controversial subject. The vast majority of investors have little or no knowledge of how to lock in an allocation. Many people think you can basically call any brokerage firm, full service or discount, place an order and then, get filled on their desired amount of shares.

These people don’t understand that their is an art to acquiring these IPO stock deals. It isn’t the same as placing and order on Cisco Systems (CSCO:NASDAQ) or buying penny stocks when the market opens. Investors don’t quite grasp that there is a limited supply of stocks. To put it in simpler terms, on some deals, it would compare to eleven people trying to buy one pizza.

Now, as scarce as that supply gets, the amount of brokerage firms involved dwindles it even further. Most IPO buys only have four to six underwriters. This means that if you don’t have an account at one of these firms, your chances of acquiring the deal are slim and none. Trying to get one a few days before the deal doesn’t work very well either. It only breeds disappointment.

The most common mistake that investors make while hunting IPO’s is to call their discount broker. Discount houses are involved in very few deals. It doesn’t matter how big your account is and it doesn’t matter how many trades you do. It’s a losing battle. So don’t waste your time.

The best way to buy an IPO stock game is to open an account at a firm that actually does deals. Just remember that major like Goldman Sachs, Barclays and Deutsche Bank are out of reach for most investors. They all require extremely high account minimums. In my opinion, the easiest route is to establish relationships at firms like Merril Lynch/BAC, Morgan Stanley or UBS. These three firms all have a huge retail presence.

Now here is the hard part to understand. Let’s say, for arguments sake, Morgan Stanley is the sole underwriter of a decent, but not super hot IPO. Even without a monster demand for the particular IPO, Morgan Stanley’s institutional side would still take a considerable piece of the deal. The institutional shares go to mutual funds, money managers, and hedge funds. All of these clients ring up monster commissions for the brokerage firm.

Now how should you play it ? Let’s use the firm XYZ for instance. They are a mid-size firm that does some quality investment banking. The easiest way to buy IPO stock from this firm or any other full service retail house is to find a broker who is a large producer. Like in any firm, in any sector, management will accommodate it’s top employees. Funding the account is another issue. Having 283k at a discount firm does not make you a big shot at any half decent full service firm. Here is where you have to sell the broker with one of three things. The first is assets. If you deposit seven figures in and show some activity, you will probably get some access to deals. The second way is a little easier. If you have smaller assets, try to ring up commissions for the brokers. And I am not talking about the $7 per trade type. If you have a good, honest broker and you pay him, he will pay you back. The last way is a little tougher. If you have a smaller account, but can refer multiple clients to the broker, you might be taken care of.

I hope this article helped clear up some of the myths of buying IPO stock. Investors seemed very upset after the General Motors IPO (GM:NYSE). They were blaming everyone from Bush to Obama because they didn’t get shares. In reality it was neither ones fault. Just remember that any successful businessman is going to take care of his top cllients or those who open doors to new clients. Put yourself in the broker’s shoes when you inquire about these deals. And if you can fill one of the three roles listed above, you may see some shares. Just be patient when you start.

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