How to Buy IPOs Through a Firm Commitment

There are many ways for a company to sell its initial public offering of shares (IPOs). Typically, several large investment banks, called the underwriters, buy the IPOs. The underwriters then decide how to sell the shares and make a profit for themselves. You can buy IPOs though a firm commitment, a common way that banks sell them.

Instructions

Difficulty: Easy

Learn to Buy IPOs Through a Firm Commitment Process

1. Figure out the number of firm commitment shares you'd like to buy. Firm commitment means that the underwriter has bought a certain amount of share for the IPO and is assuming that it will be able to sell all of them at a profit. These shares come with a standard price that often will not fluctuate at all during the IPO.
2. Find out why the offering company is selling an IPO. These shares can be a great way for a company to raise lots of money before it starts to sell shares en masse on the stock exchange. Sometimes an ailing company will also try to use an IPO to raise money to avert or solve a financial crisis.
3. Talk to your brokerage firm or your investment banker to find out if either is offering any IPOs. Often, underwriters offer IPOs to the biggest investment clients. If there are any shares left, the underwriters will offer shares to larger brokerage firms.
4. Purchase your shares through your firm or bank representative. Often this transaction will have to be finalized in person or over the phone. Some firm commitment IPOs are offered to the general public electronically, in which case you don't need to purchase them through a representative.
5. Hold on to your IPO shares for 40 days. Federal financial laws prohibit investors from disclosing any earnings on IPOs or reporting during this quiet period. After 40 days, the head underwriter of the IPO will start to research how the stocks performed in that period.

Tips & Warnings

• You should consider buying IPOs through a firm commitment instead of other IPO options. In this process, the underwriter has assumed much of the risk of the initial public offering by committing to selling a large amount of shares.
• Often, IPOs are very under priced in order to generate interest among investors. When and if the stock goes public, you might be able to make a profit by selling your shares if the company has been doing well in the 40 days since the IPO went on sale.
• IPOs are generally not intended for investors who are just getting into the stock market because they can carry so much risk.