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

Get Started with TD Direct Investing

Would you like more information?

An Initial Public Offering, or IPO, is a private company’s first offering of new stock to the investing public. This allows a company to raise capital from public investors. Learn what an IPO is, how it works, how to find new IPOs online, and more.

What is an IPO or a new issue in Canada?

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.

How does an IPO work?

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.

How is the IPO price determined?

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.  

How to find out about latest IPO stock online?

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.

Why do companies use IPOs?

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.

Benefits of investing in IPOs or new issues

Although IPOs can reflect the volatility of the market, they have potential benefits.

  1. Investing in an IPO stock can help you to get in on the ground floor of a company.

  2. An IPO stock may be more cost-effective to purchase than a regular stock.

  3. IPO investments may have potential income growth over the long term. However, this may not always be true.

Risks of investing in IPOs or new issues

There are some risks associated with buying IPOs:

  1. A company's financial success may be affected by how it trades on the stock market.

  2. There may be a lack of public data associated with a newly listed company, making the determination of its value difficult.

  3. If the IPO is overvalued, it can lead to selling pressure when it becomes listed for trading.

There could also be some disadvantages from a company's perspective:

  1. Smaller firms may be challenged by the time commitment and high compliance costs associated with becoming a public company.

  2. There are many regulatory requirements that include accounting oversight, financial reporting, audit fees and the involvement of investor relations.

What eligibility requirements must I meet to invest in a new issue or an IPO?

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.

  1. Your account must have adequate cash, equity or margin available at the time you place your Expression of Interest (the term used to place an order for a new issue or IPO).

  2. In the case of registered accounts (RSP, RIF, RESP, TFSA), cash or near cash such as money market mutual funds must be available.

  3. If you do not meet the requirement of having adequate available cash, you have the option of selling securities or making a deposit or contribution prior to placing your New Issue Expression of Interest.

How can I invest in an IPO in Canada?

To buy a new issue or IPO, as a self-directed investor, you will need to have an account with a brokerage firm and would first need to login into your account.

  1. Then, where available, review the prospectus of the offering.

  2. Enter an Expression of Interest.

  3. Some brokerages such as TD Direct Investing also allow you to call in and place an Expression of Interest over the phone with an Investment Representative.

  4. Once (or if) you receive a confirmation of an allocation, record the settlement date. This is the date the new issue or IPO transaction will take place. You must have sufficient funds in your account on that date to cover the transaction.

Other things you need to know about IPOs

Here are some other things to know about IPOs.

  1. There may be times when there are not enough shares of an issue to allocate all Expressions of Interest.

  2. When placing Expressions of Interest, you must be willing to receive either a partial fill or no fill at all.

  3. The company whose IPO shares you were allotted may not perform as expected.

  4. It is highly recommended that you review the prospectus to learn more about the company allowing you to make the most informed investment decision possible.

What IPOs does TD Direct Investing currently offer?

TD Direct Investing clients may purchase a variety of IPOs in the New Issue Centre including:

  1. Common shares

  2. Preferred shares

  3. Income trusts

  4. Fixed income products

  5. Treasury

  6. Secondary offerings for equity securities that already trade in the marketplace

Note: Most U.S. IPOs do not file prospectuses in Canada and are typically only available to U.S. residents and investors.

FAQs related to IPOs

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. 

Looking to invest in an IPO or new issue?

To buy new issues or IPOs with TD Direct Investing, login to WebBroker to register at the New Issues Centre. If you are not an existing client, you may start by opening an account.

Share this article

Related article

  • This article will help you understand how to invest your money on your own, learn about the different investment accounts, and types of investments.

View our learning centre to see how we're ready to help

Open an account online – it's fast and easy

Whether you're new to self-directed investing or an experienced trader, we welcome you.

  • Apply online

    It's easy to open a cash, margin, RSP, or TFSA account.

  • Call us

    We're here for you. Monday to Friday, 7 am to 10 pm ET

    1-800-465-5463 1-800-465-5463
  • Book an appointment

    Let's chat at a TD location convenient to you.

Have a question? Find answers here