Buying IPO stock has always been lucrative, with a yearly average return of about 10%. But what if I tell you, this even gets better when you buy pre IPO stock. You might be confused about what a pre IPO stock is, and how to buy it. Let me explain.
A public offering (IPO) is when shares of a company are made public and listed on a public exchange. A pre-initial public offering however is the private sale of large block of shares of a company before it is even listed on a public exchange. Because of the significant risks involved, these are usually bought by hedge funds, private equity firms, employees, venture capitalists and other financial institutions usually at a discounted price.
The company won’t want these buyers to immediately sell these shares, once they soar up in the exchange market. So, a lock-up period is usually enforced, to prevent such buyers from selling the shares within a short time.
The company, however, does not want these private buyers to immediately sell all their shares if their stock soars once it opens on an exchange. To prevent this, a lock-up period is generally attached to the placement, preventing the buyer from selling shares in the short term. But you might ask; if there are risks involved, why should I buy a pre IPO stock?
Why Buy Pre IPO Stocks Makes Sense
In 2020, When Ant financial services was gearing up for an IPO, the company has a valuation of $174 billion according to Blackrock. The Ant group pre-offering valuation put it even above JP Morgan Chase, the world’s most valuable bank. While that hasn’t come to pass, because the IPO was halted, it would have had a $37 Billion offering– the largest IPO of all time.
Imagine if you had gotten your hands on those stocks. That too at a bargain price.
You can sell the shares once it goes public. Most venture capitalists expect a return on investment of 10 times within 5 years.
Another reason why you should buy pre IPO stocks is, you get to have shorter holding price. While most secondary investors, have to wait for more than two years before they can sell their shares – if the company goes public, a pre IPO investor is only required to hold for less than two years. This is an even greater opportunity to earn dividends.
You are now convinced of dealing with pre IPO? Cool. Let me show you how to buy pre IPO stocks.
What you Should Do Before Buying Pre IPO Stocks
- Ask Around
- Build a Network
- Become an Angel Investor
- Ask Around
The first step in how to buy pre IPO stock is asking around. If you are an investor, ask your broker or investment advisor for any opportunity.
If you haven’t too, there are lots of investment brokers that will help you. Don’t be shy of asking around.
This step naturally comes if you have been in the investing business before. You could have a network of friends, family members or colleagues, with whom you discuss investing opportunities. Don’t hesitate to talk out with them, and build a strong network.
This will come in handy when there is an opportunity for any pre-stock acquisition. You could even ask them how to buy pre IPO stock, in case you are lost.
You can also join startup incubators and accelerator programs to keep abreast of all the startups coming up.
Become an Angel Investor
Angel investors are people who invest in startups with their own financial resources. Buying a pre IPO stock can be hard, but as a certified angel investor, this could be easy for you.
Angel investors mostly buy pre IPO stocks even before such a company goes public.
When Mike Markkula, a former employee from Intel became the first investor in Apple, with $250k in 1977 ($1 million today), he was being an angel investor. Today, that money would have been worth billions. This couldn’t have been possible if he waited for the company to go public on 12th December 1980 when one share traded for $22.00.
Becoming an angel investor is one of the ways on how to buy pre IPO stock.
Once you become one, you can buy pre IPO stocks from companies yourself. You might even watch out for companies looking for investors on social media, in the news or attend events.
Step by Step Guide to Buy IPO Stocks
- Use a Specialized Broker
- Buy From Companies Directly
- Buy From Companies Indirectly
1. Use a Specialized Broker
While becoming a venture capitalist is a long process, using a specialized broker to buy pre IPO stock is easier.
Because of their status, brokers and financial institutions always get involved in buying and selling pre IPO stocks. They might have stocks they are willing to share or buy from other investors.
The best way to buy pre IPO stock is to get in touch with such brokers. Brokers like Nasdaq Private Market have a group of buyers who buy pre IPO stocks. Such investors must however meet the SEC’s criteria.
2. Buy From Companies Directly
The best way to buy pre IPO stocks is like outlined above, to become an angel investor. This way, you get to buy pre stocks from the company directly.
To do this, you just have to keep abreast of what is happening in the startup world by watching the news and on social media. You can also register with crowdfunding platforms that will help you link you to companies directly.
3. Buy your IPO Stocks Indirectly
By now, you would have known investing in companies pre IPO is too good to turn away. This could however be hard.
While buying pre IPO stocks even as an angel investor can be difficult because of the difficult challenges and criteria, buying indirectly is always an option. You can do this by investing in venture firms and companies yourself.
You can invest in firms like the Blackstone Group allows you to buy stocks in companies with pre IPO stocks. All you have to do is, look up the sites of these companies, and contact them and all will be set!
Another way you can buy pre IPO stocks indirectly is to join Private Equity Exchange-Traded Funds like Invesco Global Listed Private Equity ETF or Global Listed Private Equity ETF that pools investor funds to purchase a wide variety of private equity shares. You just join, create an account and the rest will follow.
Just make sure you check the cost of transactions for each of these companies!
Things You Should Do Before Buying Pre IPO Stocks
- Examine the Documents
- Don’t Start Big
- Know the Guidelines
- Be Patient
- Calculate the Return of Investment Yourself
Like I said, buying pre IPO stocks is not only hard but risky as well. There might be challenges in finding the best companies to buy from, as well as stringent requirements. As such, there are some sets of best practices to follow when buying pre IPO stocks.
1. Examine the Documents
One of the mistakes you should avoid when buying pre IPO stocks is failure to check the required documents. Many people made this mistake and ended up regretting it. Before you buy any IPO stock, make sure the company has the right legal documents.
Are they registered with the Security Exchange Commissions? Have you checked the detailed summary of the company’s results, management discussions, and audited financial statements?
How about the company’s performance, key people, events, when they plan on going public and more? These are all important to check before you buy a pre IPO stock.
2. Don’t Start Big
The first rule of investing is don’t start big. Don’t start with what you can’t lose.
When Peter Thiel wanted to invest in Facebook, Paypal, the company he co-founded had been sold for $1.5 billion two years ago. Yet he only invested $500000.
Don’t always rush to investing huge amount of money. Invest small first. If it doesn’t work out, you won’t lose much in the process. It has already been proven that 90% of startups fail. If everything works out well, you can buy more later.
3. Know the Guidelines
Before you buy pre IPO stocks, you have to know the guidelines. Know the standards set by the SEC or your local regulators. Also, know the investment guides and abide by the timings.
4. Be Patient
It might take long before you earn dividends from the pre IPO stock. That doesn’t mean you shouldn’t be patient. As long as all other factors are going well, don’t be in a rush to sell your stocks yet.
5. Calculate the Return of Investment Yourself
Before you buy a pre stock IPO from a company, most promise bogus ROI. Don’t be deceived. Sit down, do your due diligence and calculate that yourself.
Return on investment is the most popular way to measure the efficiency and profitability of an investment. The ROI is calculated as;
Current Value of Investment−Cost of Investment
Cost of Investment
You can always learn more on return of investment.
Buying pre IPO stock can sometimes be tricky as well as risky. Sometimes, the restrictions make it even almost impossible. However, if you follow this step by step guide, I am sure you will make it.
You can also make a more detailed research that will help you make an informed decision when you want to buy your pre IPO stock and gain a sizable return of investment.
Remember, it is always best to consult your financial advisor before you buy your IPO stock. If you think I have omitted anything, don’t hesitate to tell me in the comments section.