tldr; usually you can’t participate directly in an IPO.
Here’s the longer explanation.
An IPO is when a private company sells its shares to the market for the first time. Every single trade except for that very first one is between other shareholders, not shareholders and the company.
I actually used to work at an investment bank where we did this kind of thing. Let’s imagine you’re the CEO of a private company and you want to have an IPO (also called ‘going public’). You might do this to raise more money for the company and / or to help existing investors cash out.
How does it work?
An investment bank helps you do the whole transaction. The bank sets an offer price for the shares and helps sell all the shares on IPO day. In fact many deals are underwritten. That means the investment bank guarantees the company they will sell all the shares being offered. The bank takes on some risk by doing this because the company going public is guaranteed the cash so it’s up to the bank to make sure all the shares get sold. If not, the bank will be holding the shares themselves.
To reduce this risk the investment bank approaches different institutional buyers. Think large asset managers like BlackRock or Vanguard that managed hundreds of billions of dollars. The institutional buyers agree to buy large amounts of the stock at the offer price on the IPO day.
Why does the investment bank only approach large investors?
It’s way easier for the investment bank.
If you have $100 million of shares to sell, it’s easier to sell them in $20 million chunks to large investors than to small individual investors (called ‘retail’ investors) like me and you who probably aren’t going to invest more than $10,000 in any one company.
But all hope is not lost yet! There is a way.
Often more than one bank works on an IPO. And let’s say you’re a client of one of those banks. Maybe you have an investment portfolio or a close relationship with them. The bank might reserve some of the IPO for their clients.
In that case, you just have to ask.
And there’s even yet another way.
Some online brokers like Questrade actually let you buy directly into certain IPOs.
For popular IPOs likely the best you’ll be able to do for now is buy it on the IPO day in the secondary market. That means you likely won’t be able to get the IPO price.
Last thing about buying on IPO days: IPOs are usually under-priced to generate market demand and have a tendency to ‘pop’ on their first day. But they also often over correct and long-term buying on the secondary market on IPO day may not make you money. Take a look at Lyft’s IPO, or Blue Apron’s for an example of this.