Brokers for Participation in IPO of Companies: Russian and Foreign

Published:1 December 2020 Updated:4 January 2024

An IPO (Initial Public Offering) is an initial public offering, which means that a company lists its shares on the stock exchange for the first time. In order to invest in an IPO, you must first of all have a very good understanding of the realities of business, so much so that you can confidently predict the success of a company that is offering its shares for the first time. And to be prepared for the fact that the forecast may be inaccurate.

IPO Basics

Technically, to invest in an IPO, you need to open an account with one of the brokersThe IPOs are not available to the public. To put money into an account and apply for a particular IPO. An application means that the investor is ready to buy shares of a particular company that is going public. The application is made before the shares are offered. Usually the number of IPO shares is limited and there are quite a few people who are willing, so the application is partially executed.

The process of allocating shares is called allocation; if there are funds left after the application, they are returned to the investor’s account. It is impossible to predict the amount of allocation the user will receive; the broker determines it himself, based on the parameters of the company and the investor’s capabilities, taking into account possible risks. At the beginning of trading at the exchange the LockUp period starts, which is determined by brokers. It is believed that brokers calculate the period so that the investor receives the maximum profit at the end of the LockUp period. Therefore, it is not recommended to sell the stock during that period and close the position. In principle, selling is possible, but the investor will be charged an additional fee for selling shares during the period.

After the end of the LockUp period, the investor closes the positions and fixes the result – profit or loss. Investing in IPOs can make an investor rich; the return on a successful IPO can reach hundreds of percent. But with the same probability of losing the investment, as investing in IPO refers to risky types of investments. With a good knowledge of the business, investing in IPOs does not differ much from other types of investments, except for potentially high returns. But there are a number of disadvantages that set it apart from other types of investing.

First, the risk of failure is very high. A small number of brokers that offer this type of investment. High entry threshold and high commissions when investing. Brokers differ in terms of market entry price, size of commissions, country of broker registration, length of LockUp period, number of IPOs offered, convenience of funds deposit and withdrawal.

Brokers

United Traders (unitedtraders.com)

United Traders is a well-known broker (Fig.1), registered in the British Virgin Islands. The company is very active in promoting the service of providing investment IPOs, specializing directly in this type of investing. But the BVI registration is not considered a plus for the broker. In addition, the broker has few options for depositing and withdrawing money.

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Unlike other IPO brokers, United Traders offers a very low entry threshold (from $50), which, however, is compensated by high, in comparison with other brokers, commissions – 3% for entry into the transaction, + 20% for profit, + 1.75% for closing the transaction. The offered LockUp period is 95 days, exit from the period will cost up to 20% from the position.

If you need to exit a trade before the end of the LockUp period, you will have to pay about 10-20% from the position (depends on the specific instrument). Under the affiliate program the broker pays up to 50% from the commissions, attracted by the partner-investor clients. According to United Traders broker’s own statistics the high commissions are compensated by the high percentage of profitable deals. But since not all investors welcome offshore brokers, many use the company’s quality analytics to invest with other brokers.

Just2trade (just2trade.online)

Just2trade is a broker registered in Cyprus and has been providing IPO investment support services for some time now, but it has been gaining popularity rather quickly. A definite advantage of the company is that it is part of the structure of the large investment holding Finam. The broker also provides an opportunity to invest in any IPO, which is a plus for investors who have successful experience of investing. For beginners, however, it is better not to do so and to rely on the data of the broker’s professional analysts.

To take part in investing in the IPO, you need to pay from 1 thousand dollars, and the broker may provide leverage 1:2, but work on such terms implies not superficial familiarity with the investment. That said, leveraged investing is not considered a desirable way to invest in a primary offering. You can get credit if you invest more than you have in the account. Broker commissions: – 4% per trade entry, + $0.006 per share with a LockUp period of 30 days. Exit from the round before the end of the LockUp period will cost 1.75% from the position. The broker has an affiliate program, which is offered on different terms. The advantage of the broker is that there are several options for deposit and withdrawal.

Freedom Finance (ffin.ru)

Freedom Finance is the only Russian broker that trades on NASDAQ, which confirms the high level of the company. This is an advantage that can be taken advantage of by overcoming some difficulties – most likely, you will have to open an account in the company’s office, which is justified if you intend to invest large sums of money. Broker Freedom Finance can IPO on the Russian and world stock exchanges, you can invest in the broker’s offices, which are located in many major cities or online, but with a commission. But to participate in the IPO, the application starts from 2 thousand dollars.

The commission for opening a deal is 5% from the position, but with the growth of the deposit the commission gradually decreases. For exit from a deal – 0.5%. The interest is paid for exiting a position before the end of the LockUp period, which depends on the conditions of the deal. The broker offers a LockUp-period of 95 days. The advantage for Russian investors is that the broker is a full-fledged tax agent of the Russian Federation, so he withholds taxes on profits, and the investor always stays within the law.

Finam (finam.ru)

Finam (Fig. 2) is one of the most famous brokers in Russia, which provides all kinds of brokerage services on the Russian market and on foreign platforms. Investments are possible from a minimum amount of $1,000. However, participation in such transactions under the broker’s terms is possible only for those who are recognized as a qualified investor in accordance with the Russian legislation.

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It is not easy to obtain the status of a qualified investor, you have to meet at least one requirement:

  • own securities worth 6 million rubles;
  • have 2 to 3 years of experience with securities, depending on the specifics of the organization;
  • to make at least one deal per month and at least 10 deals per quarter for $6 million;
  • have a specific certified education, which implies an understanding of the financial field.

In fact, meeting these requirements may not be enough. There is a separate page on the broker’s website, where you can download files with a full list of requirements for investors. In fact, any of these requirements are needed at least to understand the broker’s fee schedule.

Tinkoff Investments (tinkoff.ru)

Tinkoff Investments is a fast-growing brokerage platform. Investing IPOs is possible on the “Premium” tariff, which costs from 990 to 3,000 rubles per month, depending on the amount of money on the brokerage account. You can invest only in initial offerings selected by the broker. And only for qualified investors. The entry threshold into trading is from 5 thousand dollars. For the entrance to the trade commission is charged 2%, Lock-up period is from 14 to 180 days, exit during Lock-up – 0.25%.

ATON (aton.ru)

Detailed information about the conditions of participation in the IPO through the broker ATON is provided only to clients who directly inquire about the possibility of investing and are ready for it according to their financial capabilities. ATON is one of the oldest and most famous brokerage companies in Russia. Presumably, participation in the initial offering through ATON is possible from amounts of 100 thousand dollars. In any case, participation in the investment is only possible for qualified investors. You can invest in IPOs selected by analysts. Commission for participation is about 5%.

VTB Broker (broker.vtb.ru)

VTB Broker offers participation in IPO from the amount of 50 thousand dollars for foreign placements and 300 thousand rubles for Russian placements – with voice and no restrictions through the mobile application. According to the brokerage terms, an unqualified investor may take part in the IPO, but only on Russian platforms, and only qualified investors are allowed on foreign platforms. Interestingly, there is no Lock-up period, the commission is 0.15%. For its part, VTB offers to invest in companies with an offering volume of 200 million dollars.

Alfa Bank (alfadirect.ru)

Alfa Bank is an accredited organizer of the IPO of Russian issuers on the Moscow Stock Exchange, so it can organize investments. But to participate in it, you need to have the status of a qualified investor. You can invest only from the amount of 100 thousand dollars. It will cost 4-5% of commission to join the trades. But the exact information can be found out by contacting directly the bank, the conditions may be individual. The pluses of the institution include the fact that it is a very large bank from the top rating of banks in Russia, respectively, has an extensive sales network, a large customer base and strong analytics. Investment in the initial public offering of bonds is offered separately. Participation in it is possible at two rates.

EXANTE (exante.eu)

EXANTE (Fig. 3) has been working in the IPO market recently. It costs at least $10,000 to enter the market, and this is only when a pool of investors gathers for the initial public offering, in total, ready to invest about $5 million in any company offering, at that on the NYSE and NASDAQ exchanges. So initially there are few who can afford to invest in an IPO. But the plus side is that the broker assesses the interest of clients in any IPO and takes into account the opinion of potential investors.

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But the broker has no Lockup-periods, although it is not possible to sell shares, for example, on the first day. Another advantage is the small commissions. Applications are accepted by e-mail and telephone. A relative disadvantage of the broker is that it has only recently started working on the IPO market, and this must be taken into account when planning the investment. The broker may have individual conditions, so if you want to invest, you need to clarify the conditions further.

Open Broker Limited (open-broker.com)

The broker is part of the financial group “Otkritie” and is not a specialty of the company. The broker offers the opportunity to invest from 300 thousand dollars, while the commission to enter the trades is also very high – 7.5%. But there is no Lockup-period and does not require confirmation of qualified investor status. Russian investors have access to about a dozen other brokers, such services can provide some banks, financial companies, but listed are the main and most clients tend to get exactly on them.

Foreign brokers

Interactive Brokers (interactivebrokers.co.uk)

Interactive Brokers (Fig. 4) is an American broker that specializes in investing in companies going public in the USA. Companies are selected by the broker, evaluated according to many parameters in accordance with the rating from 1 to 3. On the first place of the rating are the most promising companies with great growth potential, on the second place – potentially promising companies, but with an increased level of risk. And in third place are companies in which it is generally not recommended to invest.

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Broker provides direct access to IPO without Lock-up periods (but these requirements may be in the conditions of the issuer and the regulator). The minimum amount of capital for participation in the IPO is large – from 100 thousand dollars, the commission is about 1-2%. At present, it is this broker of the major foreign ones that opens accounts for Russian clients. But before raising money for investment, it is necessary to clarify all the conditions and rules offered by the broker.

The fact is that the broker was fined by FINRA for weak anti-money laundering, some accounts were closed, and now the company is suspicious of such accounts, which have input and output in different countries (it may well be, if the client uses different payment systems), small amounts are often input and output, investments, trades are not from a resident country or through anonymizers and VPN, small trading account and weak client activity. So, if there are no serious intentions to really engage in investment, it is better not to risk. But if the mood is determined, you need to know more about this platform. If you manage to become a client of this broker, the client’s investments will be protected as much as possible.

Interactive Brokers is directly supervised by the SEC, FINRA and SIPC. The SEC is the main regulator of the US securities market, FINRA is the largest independent regulator of the US financial markets and SIPC is the main non-profit organization of brokers. It is the SIPC which insures the brokerage account and money of the investor, thus protecting the investor even from the bankruptcy of the broker. To get an account with a broker, even a hundred dollars is enough. But a small account, as mentioned above, will raise suspicion, and the fee for even maintaining the account will make a small account meaningless.

But if the assets are already 100 thousand dollars, the fee is canceled. But even with an account of 2 thousand dollars, the fee is already acceptable – 10 dollars per month. In addition, commissions are reduced depending on the amount of fees and, in some cases, even on age. Experienced participants argue that in any case, it makes sense to open an account with the ability to constantly have on the account of 10 thousand dollars without regard to fees and commissions.

Theoretically, in addition to Interactive Brokers, other foreign brokers are available to Russian investors. But at present it is extremely difficult, almost impossible, to register with them. Even when trying to register with Interactive Brokers, many Russian investors are rejected.

How do I choose an IPO to participate in?

Again, it bears repeating that an initial public offering is a very risky undertaking even when investing through a broker, and even riskier when investing on your own. That is why brokers mostly do not support the possibility of self-investment, but offer analytics and a limited selection of companies for IPOs. Nevertheless, there are brokers who can offer self-investment and in this case you need to know what to look out for.

First, it is necessary to monitor the volume of placement and capitalization of the company, adequately assessing them (without overestimation and without undervaluation). It is believed that the optimal placement volume is between $100 million and $500 million with a capitalization of about $1-5 billion. Capitalization of less than that may be a sign that the company is too early for an offering and has little chance of success. Too large a capitalization, firstly, may not be up to the market, and secondly, too big companies tend to grow slowly, especially if there is an alternative in the form of progressive start-ups.

The IPO market is more receptive to American IPOs. This is not only due to the fact that the U.S. offering market is the largest, most dynamic and developed, and, accordingly, there are more American companies on it, but also because the global market in general is more receptive to American projects. Despite the fact that in the last few years, everyone dreams of getting rich by investing in a startup, a more conservative strategy, as practice shows, is more reliable. This means that it is still more appropriate to invest in companies that have real revenues and a certain weight in their industry.

It is necessary to carefully study the dynamics of the company’s development, especially the way it passes through crisis periods. The growth of financial indicators does not necessarily have to be dizzying, it can simply be a good external situation. But the financial indicators should be growing steadily. It is important that both revenues and net profit margin and EBITDA grow, while at the same time, the level of debt burden should not be excessive.

It is important to clarify exactly why the company is going public – the goals should be clear and in line with a clear business strategy. It is unlikely that there will be profitable offerings, which are made so that the company can get out of debt. Before investing, it is important to benchmark the IPO company against its peers to see if the stock price is fair and how much is appropriate to invest. The company should represent an industry that is actively developing at the moment. In particular, right now it is biopharmaceuticals and everything related to medicine, especially virus research and vaccine production.

The attention of large investment funds, well-known investors, as well as the presence of large shareholders in the company’s capital is an additional plus in favor of investing. A definite advantage in investing can be the frequency of references to the forthcoming event in the media and, in general, the information background surrounding the company. Good press can provide profits almost immediately after placement. By focusing on the media, investors raise the excitement themselves and contribute to profit growth.

To complete the picture, it is also worth noting that there is another method of investing the IPO, which is carried out long before the placement of shares – pre-IPO investment. This method is for particularly advanced investors who can predict the development of the company for such a long period of time. If you can predict the dynamics of development, then one day the profit may turn into a multifold increase in assets. And some brokers provide pre-IPO investment opportunities. There are opportunities for even earlier pre-IPO for 3-5 years, but, of course, the longer the forecast period, the higher the risk of error.

The IPO is not a divorce, it’s hard work

IPO investing is by definition a high-level investment, so it’s hard to imagine fraud or a scam in this direction from a broker. But the truth is that initial public offerings are high-risk and require knowledge on the part of the investor. So it’s not surprising that the vast majority of brokers have requirements for investors to qualify for qualified status, be really wealthy and/or have experience with stocks. Qualified investor status is also necessary because it is a requirement of the Central Bank of the Russian Federation for brokers who operate under its license.

But the broker himself, in order to offer the client to invest in the IPO, must be of a sufficiently high level. The organization of investment in the initial public offering itself is not a simple process. That is why there are few brokers who offer such services. Brokers have a fairly wide range of commissions, for example, for entry – from 2 to 7.5%, but on average about 5%. The entry threshold also varies widely, from $1,000 to $300,000. Very few brokers offer to invest on their own, mostly investors work on the basis of analytics from brokers.

Lockup periods also vary, some brokers don’t have them and you can sell the stock immediately. But most brokers impose penalties or charge interest for closing positions during the Lockup period. With the right qualifications, investing in an IPO can enrich the investor. But this type of investing is not available to everyone at once. At least it is necessary to be trained in some form. You can try to start on your own, the Internet offers great opportunities for that.

In addition, many financial and brokerage companies offer training courses in IPO investing. Fortunately, this type of investing presupposes that the person who wants to invest has some money and, as a rule, already knows how to handle it. There are practically no random people in investing in IPOs, the terms of investment and requirements for investors cut them off long before they enter the bidding.

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