Investing in IPO Stocks

An initial public offering (IPO), or “going public,” is when a private company begins selling stock to public investors. Though risky for beginners, buying an IPO stock can be exciting, as you could have the chance to “get in on the ground floor” before a potentially great stock starts making extraordinary leaps. 

How exactly does an IPO work, what are the steps to buying one, and should you take the plunge? Let’s take a closer look at IPO stocks and see. 

What are IPO stocks?

An initial public offering (IPO) is simply the first time the public can trade a company’s shares on a stock exchange. Before an IPO happens, companies are privately held by a small group of shareholders, such as the company’s founders, its employees, and venture capitalists. Once the company goes public, it allows outside investors to own a slice of the company, allowing them to profit when share prices go up, as well as make certain decisions, such as who makes up the board of directors.

Companies go public to raise more funding for its own development. Typically, a company will reinvest shareholders’ money in product research and development, helping the company grow bigger in the long-run. 

How does an IPO work?

Once a company decides it’s ready to go public, the journey from private ownership to trading on a public exchange involves a series of carefully coordinated steps. This process is not just about issuing stock — it’s a complex transformation that requires financial preparation, regulatory approval, and strategic marketing.

The goal is to position the company for a successful debut in the public markets, attract investors, and secure the capital needed for future growth. Here’s how the process typically unfolds:

1. Hiring an Investment Bank

The company begins by hiring an investment bank to guide the IPO process. The bank acts as an intermediary between the company and the stock market. It helps:

• Determine the company’s stock value
• Plan the issuance of shares to investors

2. Underwriting the IPO

The investment bank initiates a process known as underwriting, which involves:

• Estimating how much capital the company needs to raise
• Identifying the type of securities to be offered
• Outlining the fees and costs involved
• Reviewing and refining the company’s financials to improve profitability and potentially increase the initial share price

3. Filing with Provincial Regulators

In Canada, there is no national securities regulator. Instead, the investment bank files a registration statement with provincial regulators. These regulators:

• Review the filing to ensure all relevant information is disclosed
• Approve the IPO if everything is in order
• Set a future date for the IPO launch

4. The Marketing Phase

Once approved, the company and bank enter a marketing phase to build public interest. This includes:

• Generating buzz around the upcoming stock offering
• Releasing an initial prospectus that outlines the company’s financials and key business details for potential investors

5. Setting the Share Price

As the IPO date nears, both the company and bank decide on the initial share price. This critical step considers:

• The company’s financial health
• Market conditions
• Investor enthusiasm generated during the marketing phase

The goal is to set a price high enough to raise funds but not so high that it deters investors.

6. Going Public

When the IPO date arrives, the company’s stock becomes available for public trading on an exchange — and the game begins!

How can you buy IPO stock?

We hate to break it to you, but not everyone can buy IPO stock. In order to get your hands on this type of stock before it hits the market, you’ll have to jump through a number of hoops. If you’re interested, here’s what you should expect to do:  

1. Use a broker who has IPO stock 

Not every broker will have access to IPO stock. Investment banks typically divide shares and allocate them to different brokerages, leaving some out. If you’re working with one of the best brokerages in Canada, you might have access to these shares, but it’s worthwhile to double-check before you sign up whether a brokerage has sold IPO stock in the past. 

2. Demonstrate eligibility 

Now, just because your broker sells IPO stocks doesn’t mean they’ll sell it to you. Often, each brokerage has certain requirements you must meet in order to buy IPO stock. For instance, they may require you to have a certain amount of money in assets, or they may look at how many times you’ve traded in the last year. 

3. Request shares 

If you do meet requirements, and your brokerage allows you to buy IPO stock, then congrats — now you get to decide how many shares you actually want to buy. 

At this point everything is still hypothetical: though you may request, say, 100 shares, your brokerage may only give you five. Typically, at this point, you won’t know the price, either. So you may request 100, then lower your shares when you find out how much they cost. 

4. Place your order 

Finally, the big day arrives: the investment bank and company have decided on a share price. Your broker will contact you immediately, letting you know how much each share will cost, as well as give you a deadline to place your order. Usually, you still won’t know how many shares you’ll receive (if any at all). But, at least you can be certain how much you’ll pay per share, as well as the maximum number you could receive. 

What are the pros to buying IPO stocks?

Perhaps the biggest benefit to buying an IPO stock is the potential to get extraordinary gains with a stock’s long-term growth. If you buy a stock at its initial price, you can potentially maximize returns, so long as the stock doesn’t fall below its IPO price. 

Consider Shopify, for instance. When Shopify went public in 2015, its shares sold at a mere $17 a pop. If you had bought 588 shares of Shopify back then (roughly $10,000), you’d be a millionaire today. 

What are the cons?

But not every IPO becomes a Shopify. For every success story, there are dozens, if not hundreds, of failures. In fact, if the biggest advantage to IPO stocks is extraordinary gains, the biggest disadvantage is the opposite — buying an IPO stock that eventually flops. Investors can lose a lot of money if a company’s stock never rises above its IPO price (Lyft and Uber are the first to come to mind). 

For that reason, investors should approach IPO stocks with a long-term perspective. Canadian who are nearing retirement have no business playing around with IPOs, as they can take years, sometimes decades, to reach a place where investors are making money. 

Pros and Cons for buying IPO Stocks

IPOs Trends in the TSX for 2025

The IPO landscape in 2025 is defined by a mix of pent-up potential and market hesitancy. While global IPO pipelines surged year-over-year in Q1, particularly in industrials, health sciences, and construction sectors, completed listings grew modestly as issuers grappled with volatility tied to geopolitical shifts, inflation, and post-election policy uncertainty.

The Toronto Stock Exchange (TSX) mirrored this cautious trend, with no new IPOs in Q1 2025, while smaller exchanges like the CSE saw limited activity. However, sectors such as clean technology, life sciences, and energy remain focal points for future listings, driven by investor appetite for innovation and sustainability. For IPO investors, 2025 demands a strategic balance-targeting sectors with robust pipeline growth while navigating a market still finding its footing after years of subdued activity.

Should you invest in IPOs?

IPO stock can be super exciting. After all, who wouldn’t want to get in early on owning a Shopify, an Amazon, or a Tesla before the stock shoots up? 

For beginning investors, however, IPO stock investing can be difficult, if not downright risky. For one, you’ll need to meet your broker’s requirements to buy IPO stock, having the appropriate amount of money in assets or the required trading experience. Even if you meet the requirements you’ll still need to dig deep into a company (its competitive advantages, management, and size of its market sector) before you decide to buy its stock. 

For those just starting out, you might want to get some more investing experience before you play with IPOs. Because companies and investment banks build tons of hype around a stock, it can be easy to get sucked into a bad investment. In addition, IPO stocks tend to underperform the market in the short-term, while others will become long-term losers. 

While we don’t want to discourage you from buying an IPO stock in a company you believe in, we do encourage you to be careful — there are plenty of high-quality stocks you can buy right now. If you keep a long-term perspective, you can build incredible wealth on stocks young and old, without requiring you to “get in early” on a hot deal.