How to Buy IPOs Through a Dutch Auction

The initial public offering, or IPO, is the first group of stocks that a company offers to the public for purchase. These stocks are usually sold through an investment bank in a limited amount. One of the ways to buy IPOs is through a Dutch auction.

Instructions

Difficulty: Moderately Easy

Learn to Buy IPOs Through a Dutch Auction

1. Talk to your broker at the investment bank to see if he has any IPOs available. Typically, an investment bank sponsors IPOs. The bank is called the underwriter and buys a set amount of shares.
2. Ask your investment banker if you need to maintain a minimum balance in your account in order to continue to participate in IPO auctions. Many underwriters reserve the right to offer IPOs to only their best customers, so you might need to have an established relationship with yours, as well as have maintained a fairly large minimum cash balance.
3. Look at the price of the shares. In a Dutch auction, the IPOs shares will start at a maximum price. Until the stocks sell, the price of the IPOs will continue to decrease until demand is satisfied.
4. Follow the price of the IPO auction during the day. Most investment computer software cannot track IPO auctions because the information isn't publicly available yet. Talk to a representative about how you can follow the auction price, which could be in person or over the telephone.
5. Inform your investment banker when the IPO reaches a price that you can afford. You'll have to know how many shares you want to purchase at this price. The quicker you make a decision, the more likely you'll be able to buy all of the shares that you want.

Tips & Warnings

• You should think about the risks involved before bidding for IPOs in a Dutch auction. Often the real value of the shares won't be determined until 25 days after the close of the auction, when investors can disclose company financial information.
• Remember that there are other investors tracking each IPO Dutch auction with as much interest as you. Try to make smart investment decision quickly.
• Keep in mind that some IPOs are available to the public through electronic Dutch auctions. These can typically be accessed by your investment bank and your personal broker.
• There is a fairly large risk associated with IPO purchases. How the underwriter sells its shares can be a direct reflection of the level of confidence in the budding business.