What is an Initial Public Offering (IPO) and how does it work?

A new issue is a security that is offered for sale in the primary market before it begins trading on exchanges in the secondary market. IPOs and new issues are typically sold by a group of underwriters or, in some cases, directly by the company. These securities can take many forms including common shares, preferred shares, trust units, subscription receipts or bonds.

A company can offer a new issue as an initial public offering (IPO) or a treasury offering. The IPO is the most commonly recognized new issue and is the process by which a private company becomes a public company and sells its shares to the public for the first time. A new issue sold by an existing public company is considered a treasury offering.

In its initial stages, a private company can grow with the help of its own founders, venture capitalists, or early investors.

Once a private company grows to a certain stage and can meet the regulations of going public, it then advertises its intentions to go public by issuing an IPO and filing a preliminary prospectus.

For IPOs, where there is no actively traded stock, companies will file preliminary prospectus documents on SEDAR (System for Electronic Document Analysis and Retrieval) for public review. However, these documents don’t provide timelines and scheduling for when the marketing will commence.

Companies work with underwriters and investment banks to determine the IPO’s initial price. Banks will then set a price range for the IPO based on the company’s financial information, prospects for growth, and the expected demand from investors. However, the final price will ultimately depend on the actual demand from investors. If demand is high, the IPO price will tend to go up, but if demand is low the final IPO price may fall.

Keep in mind that the IPO offer price may not reflect the company’s actual value. To ensure IPOs do well, they are often initially priced at the upper end of the estimated price range. Informed investors will determine the true value of IPO stocks by reviewing the issuing company’s balance sheet and past performance. They’ll also stay up to date with recent IPO news to try and get a better idea of the actual value of an IPO and any risks associated with investing.

The majority of upcoming new issues are not pre-marketed, as it would affect the underlying stock quote. In these cases, one of the ways to know when marketing has commenced on a new issue is to sign up to receive a new issue email notification, a feature available through the TD Direct Investing trading platform, WebBroker. However, you must be an existing TD Direct Investing client, or you may become one by opening an account .

TD Direct Investing gives you access to hundreds of new issues each year at the New Issues Centre , where you can:

Browse current new issues.

View a company's Preliminary Prospectus online.

Place Expressions of Interest for new issues.

View your Expression of Interest confirmation.

View past new issues that were offered through the New Issues Centre.

An IPO provides a company with the opportunity to raise funds from public investors in order to expand.

While companies use IPOs primarily to grow; when their new issues go public, they can experience an increase in public awareness – which can potentially increase market share.

As a self-directed investor, to invest in an IPO, you'll need a brokerage account that supports new IPOs. The choice is yours.

To buy a new issue or IPO through TD Direct Investing, you will need to have a self-directed account and meet these eligibility requirements.

What happens when a company goes for an IPO?

An IPO is the first time a company makes its shares available for purchase by the public. Issuing an IPO can be an effective way for companies to raise additional capital.

Can you buy IPO stocks in Canada?

IPO stocks can usually be purchased through an online trading platform such as WebBroker from TD Direct Investing. They can also be purchased through a broker. Just be aware that some brokers may have additional eligibility requirements, such as requiring you to maintain a minimum account balance or complete a minimum number of trades.

As with any stock, the price of an IPO will vary as demand for the stock rises and falls, so be sure to research the company and its valuation before deciding whether to invest.

Is it good to buy an IPO?

As with any stock, investing in an IPO comes with certain risks. However, it also brings the possibility for gains. As always, do your research before deciding whether buying an IPO is right for you.

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Ever want to "get in on the ground floor" of the next big thing?

Initial Public Offerings, or IPOs, can be one way to do that!

If a private company wants to raise money to grow or pay down debt, they may launch an IPO…

This means they'll offer stock for the first time to everyday investors and become a publicly traded company.

With that in mind, let's talk risk.

First off, there may not be much info about a newly listed company. Some may not even be making any profits yet.

That can make it tough to determine how much it's really worth, and you could end up overpaying for the shares.

Second, there may be a lot of demand for an IPO, which can cause the stock to trade above its original listing price when it first hits the market.

So, some early investors might try to make a quick buck by selling the shares on the exchange soon after they start trading, which can quickly drive down the price.

That said…the opposite has happened too! So, IPOs are a risk some investors choose to take.

As with any trade, it's a good idea to review all the info in the company's prospectus before jumping into an IPO.