InvestHL Archives

Sep

2025

IPO vs Acquisition: Advantages and Disadvantages

By Paulina Likos | Growing Wealth, invest, Investing | Comments Off

Table of Contents

How IPOs Work
Advantages of Going Public
Disadvantages of Going Public
What Is an Acquisition?
Advantages of Being Acquired
Disadvantages of Being Acquired
FAQ

An IPO, or initial public offering, is when a company makes its shares available for public trading for the first time. An acquisition is when one company takes over another company.

The difference between an IPO vs. an acquisition is important for investors to understand. When a company applies for an IPO, it enters into a process to be listed on a public exchange where investors can buy its shares. In an acquisition, the company being bought may not survive — or it may thrive, but only as part of the newly combined organization.

Investors contemplating investing in companies undergoing an IPO or an acquisition would do well to think through the benefits and risks.

Key Points

• An IPO, or an initial public offering, allows a private company to offer shares to the public to raise capital and enhance visibility.

• An acquisition occurs when one company buys a large portion, or all, of another company, taking control over its assets and operations.

• IPOs involve going public to raise funds and gain publicity, while acquisitions entail one company taking over another, potentially merging their resources and strategies.

• IPOs may result in raising substantial funds and publicity, but they also involve high costs, stringent regulations, and they expose companies to market volatility.

• Acquisitions can foster growth and innovation but may lead to conflicting priorities, strained partnerships, and brand reputation risks.

How IPOs Work

Private companies can go public with an IPO. That’s when they sell their shares to investors for the first time to raise capital to fund growth opportunities, create more awareness about the company, or to acquire other businesses, among other possible reasons.

The IPO process typically involves the private company hiring an underwriter like an investment bank to guide them through. The underwriter conducts an evaluation of the company to determine its valuation and growth potential, and helps the company decide the initial share price and the number of shares to offer.

Then the underwriter helps market the offering through what’s known as an IPO roadshow. The final IPO price is generally determined by investor demand.

Once the IPO has been reviewed and approved by the Securities and Exchange Commission (SEC), the company is listed on a public stock exchange where qualified investors can buy shares of the IPO stock.

Because IPO stock is highly volatile, it can be risky for retail investors to plunge into IPO investing. Doing thorough due diligence before investing in an IPO or any type of security is critical.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

Advantages of Going Public

Taking a private company public has a number of possible advantages. These include:

Capital for Investment

For a company, the biggest benefit of an IPO is raising capital. Once investors start buying IPO stocks, the proceeds from an IPO may be substantial. The company typically uses the capital it raises for internal investments and expansion.

For example, the company could allocate the money to pay for research and development, hire more staff, or expand its operations.

Publicity

In some cases, IPOs generate publicity. This, in turn, can drive more attention to the company and get investors interested in purchasing shares of its stock. IPOs are frequently covered in business news, which adds to the IPO buzz.

However, if there is too much hype, that can contribute to high expectations for the stock, which can create stock volatility after the IPO.

Valuation

Some companies that go public may end up having higher valuations. Certainly, that is a hoped-for result of the IPO process. Because a public company has access to more capital, the shares of the company can increase in price over time. However, they can also lose value.

Disadvantages of Going Public

There are also drawbacks to going public. Companies must adhere to a series of steps and regulations in order to have a successful IPO, and the process can be arduous. Here are some of the disadvantages.

High Cost

Going public is expensive. The company needs to work with an investment bank that acts as an underwriter, and this is one of the largest costs associated with an IPO.

As noted earlier, IPO underwriters review the company’s business, management, and overall operations. In addition, legal counsel is required to help guide the company through the IPO. There are costs associated with accounting and financial reporting, and companies also accrue fees for applying to be listed on the exchange.

Not Enough Information for Investors

From an investor’s perspective, investing in an IPO can be challenging and risky. A company pursuing an IPO may be fairly new. In that case, investors may not have enough information or historical data on the company’s performance to make a determination on the company’s true value in order to decide whether the IPO is a sound investment.

Stock Market Stress

Once a company goes public, it is on the public market where it is subject to such factors as scrutiny, market volatility, and investor sentiment. Every move and decision the company makes, such as a corporate restructuring, change in leadership, or release of earnings reports, will be reviewed closely by industry analysts and investors, who will provide their opinions on whether the company is doing well or not.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

What Is an Acquisition?

An acquisition is when one company, the acquirer, buys a majority or controlling stake in another company, the target.

This gives the acquiring company control over the target company’s assets and operations. The target company typically becomes a subsidiary of the acquiring company.

Advantages of Being Acquired

Being acquired doesn’t have to signal the end of a company — in fact, sometimes it can be a lifeline. These are some of the potential perks.

Growth

An acquisition could help a target company move into new markets and become a leader in its industry. If the company is working in a competitive landscape, being acquired may help increase its value and allow it to gain more market strength.

Innovation

When one company acquires another, this allows both companies’ resources, employees, and experiences to come together. This may enable the bigger company to generate new ideas and business strategies that may help increase the company’s earnings. It can also create a new team of employees with specialization and expertise that could help the company develop and reach new goals.

More Capital

When an acquisition occurs, it can increase the cash holdings and assets of the acquiring company and allow for more investment in the newly formed bigger company.

Disadvantages of Being Acquired

There are also distinct downsides to being acquired by another company, such as:

Conflicting Priorities

In some acquisition scenarios, there may be competing priorities between the two companies. The acquiring company and target company once worked as individual entities, but now, as one company, both sides must work together to be successful, which may be easier said than done. If there isn’t alignment on the goals of the organization as a whole, there is a possibility that the acquisition may fail, or the transition could be rocky and prolonged.

Pressure on Existing Partnerships

When an acquisition occurs and a company grows in size, it is likely that their goals will grow as well. For example, if the company wants to develop more products to expand into new markets, this could require their suppliers to figure out how they are going to ramp up production to meet the demand.

The supplier may need to raise more capital to hire staff or purchase additional equipment and supplies, which could cause stress.

Brand Risk

When two companies come together, if one has a poor reputation in the industry, the acquisition could put the other company’s brand at risk. During the acquisition process, both companies’ reputations may need to be evaluated to decide whether they merge under one brand or are marketed as separate brands.

The Takeaway

Both initial public offerings (IPOs) and acquisitions can offer opportunities for investors. However, these two events are quite different. An IPO is when a private company decides to go public and sell its shares to investors on the public market, while an acquisition is when one company buys another company.

There are a number of pros and cons regarding IPOs, just as there are advantages and disadvantages when a company is acquired. Potential investors need to thoroughly research each scenario to make sure it’s the right opportunity for them.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Is an acquisition an IPO?

No, an acquisition is not an IPO. An acquisition is when one company purchases part of or all of another company to form one new company. An IPO is when a private company goes public and sells its shares to investors on the public market.

What is the difference between an IPO and a takeover?

An IPO is when a private company decides to go public and sell its shares to investors on the public market. A takeover is when one company takes control of another company. A takeover may be hostile, meaning it is unwanted by the target company’s management.

Is a takeover the same as an acquisition?

No, a takeover and an acquisition are not the same thing. However, a takeover is a type of acquisition. An acquisition is the purchase of a target company, and it may be friendly or hostile. A takeover is an acquisition that is typically unsolicited and unwelcome by the target company.

Photo credit: iStock/Yuri_Arcurs

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This article is not intended to be legal advice. Please consult an attorney for advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOIN-Q325-083

Sep

2025

What is an IPO Underwriter? What Do Underwriters Do?

What Is an IPO Underwriter and What Do They Do?

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is an IPO Underwriter?
What Is IPO Underwriting?
What Does an IPO Underwriter Do?
What Qualifications Does an IPO Underwriter Need?
The IPO Underwriting Process
FAQ

An initial public offering (IPO) underwriter is typically a large investment bank that works closely with a company to issue stock on the public markets. The underwriters are usually IPO specialists who work for the investment bank.

In the world of equities, underwriters work with private companies to value their operations, connect with potential investors, and issue stock on a public exchange for the first time.

Key Points

• An IPO underwriter is typically a large investment bank that works closely with a company to issue stock on the public markets.

• An underwriter helps create the market for the stock by contacting potential investors and setting the IPO price.

• The underwriter also conducts due diligence, does regulatory filings, and issues a prospectus about the company.

• IPO underwriters need a Bachelor’s degree, but it also helps to have certain other skills and experience in economics and math.

• The IPO underwriting process takes as little as six months or more than a year from start to finish.

What Is an IPO Underwriter?

IPO underwriters guide the company that’s issuing stock through the IPO process, making sure they satisfy all of the regulatory requirements imposed by the Securities and Exchange Commission (SEC), as well as the rules imposed by the exchange, such as the Nasdaq and the New York Stock Exchange (NYSE).

Recommended: What Is an IPO?

Role and Benefits of an IPO Underwriter

Aside from the fact that an underwriter is required during the IPO process, there are many benefits to this role. An IPO’s underwriter helps create the market for the stock by contacting a wide range of institutional investors, including mutual funds, insurance companies, pension funds and more.

Key Functions of an IPO Underwriter

An IPO underwriter reaches out to this network of investors to gauge their interest in the company’s stock, and to see what those investors might be willing to pay. The underwriter uses those conversations to set the price of the IPO.

From there, the underwriter of an IPO works with the company issuing the stock through the many steps that lead up to its IPO. Depending on the type of deal the underwriter and the company issuing the IPO have, the underwriter may or may not be responsible for purchasing any unsold shares at the price it set for the IPO.

The way that IPO underwriters get paid depends on the structure of the deal. Typically, IPO underwriters buy the entire IPO issue and then resell the stocks, keeping any profits, though in some cases they receive a flat fee for their services.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

What Is IPO Underwriting?

An IPO is the process through which a private company “goes public”, and has its shares sold to regular investors on a public market. The company issuing stock works with the IPO underwriters throughout the process to determine how to price their stock and generate interest among potential investors.

Many companies find their way to the investing public through a group of underwriters who temporarily join forces to purchase the shares and then sell them to investors. These are groups of investment banks and broker-dealers. Some of these “underwriting syndicates,” as they’re known, sell exclusively to institutional investors.

What Does an IPO Underwriter Do?

In essence, an underwriter in an IPO is the intermediary between a company’s executives and owners (including venture capitalists) who are seeking to issue shares of stock and public-market investors.

When a company seeks funding from the capital markets, it must make dozens of decisions. How much money does the company want to raise? How much ownership will it cede to shareholders? What type of securities should it issue? The company must also determine what kind of relationship the company wants to have with its underwriter.

Underwriting agreements take different forms, but in the most common agreement, the underwriter agrees to purchase all the stock issued in the IPO, and sell those shares to the public at the price that the company and the underwriter mutually agree to. In this agreement, the underwriter assumes the risk that people won’t buy the company’s stock.

Sometimes a company works with a group of underwriters who assume the risk and help the company work through the many steps toward an IPO. This involves issuing an S-1 statement. This is the registration form that any company needs to file with the Securities and Exchange Commission (SEC) to issue new securities.

The S-1 statement is how companies introduce themselves to the investing public. S-1 requires companies to lay out plans for the money they hope to raise. The IPO underwriter also creates a draft prospectus for would-be investors.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

What Qualifications Does an IPO Underwriter Need?

Becoming an IPO underwriter, and bringing private companies into the public marketplace, requires understanding how businesses work, and how the equity markets function.

At minimum an IPO underwriter needs a Bachelor’s degree, but it helps to have certain other skills and experience. For example, would-be underwriters might consider a background in economics as well as math. Underwriters generally need good analytical, communication, and computer skills.

Educational and Professional Requirements

There are a number of certifications that apply in the underwriting field in general, but there isn’t a specific designation for IPO underwriters. It can be more common for someone who wants to work with IPOs to get their Masters in Business Administration (MBA), and from there to work at an investment bank.

The IPO Underwriting Process

Underwriting an IPO can take as little as six months from start to finish, though it often takes more than a year. While every IPO is unique, there are generally five steps that are common to every IPO underwriting process.

Step 1. Selecting an Investment Bank or Broker Dealer

The issuing company selects an underwriter, usually an investment bank. It may also select a group or syndicate of underwriters. In that case, one bank is selected as the lead underwriter known as the book runner.

One kind of agreement between the issuing company and the underwriter is called a “firm commitment,” which guarantees that the IPO will raise a certain sum of money. Or they may sign a “best efforts agreement,” in which the underwriter does not guarantee the amount of money they will raise. They may also sign an “all or none agreement.” In this agreement, the underwriter will sell all of the shares in the IPO, or call off the IPO altogether.

There is also an engagement letter, which often includes a reimbursement clause that requires the issuing company to cover all the underwriter’s out-of-the-pocket expenses if the IPO is withdrawn at any stage.

Step 2. Conduct Due Diligence and Start on Regulatory Filings

The underwriter and the issuing company then create an S-1 registration statement. The SEC then does its own due diligence on the required details in that document. While the SEC is reviewing it, the underwriter and the company will issue a draft prospectus that includes more details about the issuing company. They use this document to pitch the company’s shares to investors in meetings known as IPO roadshows. These roadshows usually last for three to four weeks, and are essential to gauging the demand for the shares.

Step 3. Pricing the IPO

Once the SEC approves the IPO, the underwriter decides the effective date of the shares. The day before that effective date, the issuing company and the underwriter meet to set the price of the shares. Underwriters often underprice IPOs to ensure that they sell all of their shares, even though that means less money for the issuing company.

Step 4. Aftermarket Stabilization

The underwriter’s work continues after the IPO. They will provide analyst recommendations, and create a secondary market for the stock. The underwriter’s stabilization responsibilities only last for a short period of time.

Step 5. Transition to Market Competition

This final stage of the process begins 25 days after the IPO date, which is the end of the “quiet period,” required by the SEC. During this period, company executives can not share any new information about the company, and investors go from trading based on the company’s regulatory disclosures to using market forces to make their decisions.

After the quiet period ends, underwriters can give estimates of the earnings and stock price of the company.

Some companies also have a lock-up period before and after they go public, in which early employees and investors are not allowed to sell or trade their shares.

The Takeaway

The IPO underwriter, typically a large investment bank, plays a vital role in the process of taking a company public.

They help to guide the company through the many hurdles required to go public, including making sure the fledgling company meets all the criteria required by regulators and by the public exchanges. The IPO underwriter helps drum up investor interest in the new company and in setting the initial valuation for the stock.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What are the responsibilities and duties of an IPO underwriter?

IPO underwriters have numerous responsibilities. They not only shepherd the private company through the IPO process, they reach out to institutional investors including mutual funds to gauge interest and set the initial price of the stock. They buy the securities from the issuer, and sell the IPO stock to investors via their distribution network.

Can multiple underwriters be involved in an IPO?

Yes. Sometimes more than one underwriter is required to help a company meet all the criteria set by the SEC and by the public exchanges. There may even be groups of investment banks and broker-dealers working together on an IPO, depending how big it is. This is typically known as an underwriting syndicate.

What criteria do companies consider when selecting an IPO underwriter?

The experience and reputation of the underwriter are important criteria companies use when selecting an underwriter. Companies may also consider an underwriter’s distribution network as well as their fees and terms.

Can the performance of an IPO underwriter impact the success of the IPO?

Yes. Some industry data suggests that the better an underwriter’s reputation, the more accurate the initial pricing is, and the less likely there will be long-term underperformance.

Photo credit: iStock/katleho Seisa

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOIN-Q325-067

Sep

2025

IPO Book-Building Process Explained

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Book Building?
Book-Building Process
What Is Partial Book Building?
What Is Accelerated Book Building?
What Effect Does Book Building Have On IPO Prices?
FAQ

Initial public offering (IPO) book building is a process to help determine the share price for an IPO.

With book building, the investment bank that underwrites an IPO reaches out to institutional investors to gauge their interest in buying shares of a company looking to go public. The underwriter asks those interested to submit bids detailing the number of shares they seek to own and at what price they would be willing to pay.

Read on to discover how book building works and how it can affect the price of an IPO.

Key Points

• Book building is the preferred method by which a company prices IPO shares.

• There are five key steps in the IPO book building process: find a banker, collect bids, determine a price, disclose details, and allotment.

• Partial book building is restricted to institutional investors, while accelerated book building is used for large equity offerings to raise capital in a short period.

• The risk of an IPO being underpriced or overpriced when shares go public can lead to volatility, making IPO investing a high-risk endeavor.

• The goal of book building is to ensure proper market-based price discovery to help the issuing company set a fair share price.

What Is Book Building?

Book building is the preferred method by which a company prices IPO shares. It is considered the most efficient way to set prices and is recommended by all the major stock exchanges.

Among the first steps of the IPO process is for the private company to hire an investment bank to lead the underwriting effort. IPO book building happens when the IPO underwriter gathers interest from institutional investors, such as fund managers and other large investors, to “build the book” of that feedback and determine the value of the private company’s shares.

As part of the IPO process, the investment bank must promote the company and the offering to stir up interest before they can determine share price.

This is typically called an IPO roadshow. If the underwriter finds that there is sufficient interest based on responses from the investor community, then the bank will determine an offering price.

Book building is common practice in most developed countries. It has become more popular than the fixed-pricing method, which involves setting an IPO price before measuring investor interest. Book building, on the other hand, generates and records investor interest to land on an IPO price.

Book building can help find a fair share price for a private company based on market interest. When a bank gauges market interest, a floor price is sometimes used, and bids arrive at or above that floor price. The stock price is determined after the bid closing date. With the book building method, demand can be seen in real-time as the book is being built.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

Book-Building Process

Firms going public want to sell their stock at the highest possible price without deterring the investment community. There are five key steps the issuing company must perform in the process of IPO book building in order to discover a market-based share price.

1. Find a Banker: The issuing company hires an investment bank to underwrite the transaction. The underwriter advises the company, guiding it through the lengthy book-building process. The investment bank, as a firm commitment underwriter (the most common underwriting arrangement in an IPO), also commits to buying all the shares from the issuer, carrying all the risk. The bank will then resell the shares to investors.

2. Collect Bids: The investment bank invites investors to submit bids on the number of shares they are interested in and at what price. This solicitation and the preliminary bids give the bankers and the company’s management an indication of the market’s interest for the shares. Roadshows are often used to grow investor appetite.

3. Determine a Price: The book is built by aggregating demand as the bids arrive. The bank uses a weighted average to determine a final cutoff price based on indications of interest. This step helps with pricing an IPO.

4. Disclosure: The underwriter must disclose details of the bids to the public.

5. Allotment: Accepted bidders are allotted shares.

Even if the IPO book-building process goes smoothly and a price is set, it does not ensure that actual transactions will take place at that price once the IPO is open to buyers. Book building simply helps to gauge demand and determine a fair market-based price. But substantial risks remain for interested investors, who could see steep losses if the share price drops after the IPO.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

What Is Partial Book Building?

Partial book building is another form of the IPO book-building process that happens only at the institutional level, rather than the retail level.

With partial book building, a select group of investors is approached regarding their interest in the IPO. Using their bids, a weighted average price is calculated and a cutoff price is determined. That cutoff price is then used as the public offering price to retail investors as a fixed price. The cost of the partial book-building IPO process is often lower due to its relative efficiency.

What Is Accelerated Book Building?

Accelerated book building is used for large equity offerings to raise capital in a short period of time. The investment bank is tasked with book building, determining a cutoff price, and allocating shares within 48 hours or less. No roadshow is involved.

The accelerated book-building process is typically used when a company needs immediate financing and raising capital from debt is off the table. It is typically done when a firm seeks to acquire another company.

Accelerated book building is often conducted overnight, with the issuing company asking investment banks to serve as underwriters before the next day’s placement.

What Effect Does Book Building Have On IPO Prices?

A good IPO book-building process helps ensure proper market-based price discovery. Still, there is the risk that an IPO can be underpriced or overpriced when shares finally go public. This can lead to volatility, which IPO investors also need to be aware of. This is one reason why IPOs are considered high-risk endeavors.

Underpricing happens when the offering price is below the share price on the first day of trading. In other words, the IPO is selling for less than its true market value. With an underpriced IPO, a company is said to have left money on the table because they could have set the offering price higher.

An overpriced IPO — meaning the offering price is above the stock’s true market value and higher than investors are willing to pay for it — can have negative implications for the future price of a stock due to poor investor response.

Investors may buy IPO stock on Day One of trading in the secondary market, while qualified investors can purchase IPO shares before they begin trading in the open market.

While there is no surefire way to guarantee a good IPO price, the book-building IPO method generally offers quality pre-market price discovery customized to the issuer. It also reduces the risk for the underwriter. It can have high costs, however, and there is the risk that the IPO will end up being underpriced or overpriced. The overall goal is to see a good and steady stock performance during and after the IPO.

The Takeaway

The book-building IPO process involves five critical steps to ensure a stock goes public promptly with as few hiccups as possible.

There are different types of IPO book building, and the way an investment bank performs the process can impact IPO prices. The goal is to set a fair market-based price for shares of the company looking to go public.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What are the steps in book building?

There are five main steps in the book-building IPO process:

1. The issuing company hires an investment bank to underwrite the offering. The bank determines a share price value range and writes a prospectus to send to potential institutional investors.

2. The underwriting bank invites institutional investors to submit bids on how many shares they want to buy and at what price.

3. The book is built by sorting and summing up demand for the shares to calculate a final IPO price. It’s known as the cutoff price.

4. The investment bank is required to disclose the details of submitted bids to the public.

5. Shares are allocated to bidders who meet or exceed the final cutoff price.

What is 100% book building?

100% book building is when all of the company’s shares are sold through the book-building process. The final issue price of the shares is determined entirely by investor bids and demands.

Who carries out book building in an IPO?

The underwriters in an IPO, which are typically large investment banks, carry out the book building process. They build the book by asking institutional investors to submit bids for the number of shares of the company they’d be willing to buy and the price they would pay for the shares. They then list and evaluate investor demand based on the bids and use that information to set a price for the shares.

Photo credit: iStock/PeopleImages

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-080

Sep

2025

What Are Cyclical Stocks?

By Rebecca Lake | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is a Cyclical Stock?
Cyclical Stocks Examples
Cyclical Stocks vs Non-cyclical Stocks
Pros and Cons of Investing in Cyclical Stocks
How to Invest in Cyclical Stocks
FAQ

Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves through upturns and downturns. A cyclical stock is the opposite of a defensive stock, which tends to offer more consistent returns regardless of macroeconomic trends.

Investing in cyclical stocks could be rewarding during periods of economic prosperity. During a recession, however, certain types of cyclical stocks may be affected if consumers are spending less.

Key Points

• Cyclical stocks may align with economic trends, offering higher returns during periods of growth.

• Cyclical stock investments may represent discretionary items that consumers may be less likely to purchase when the economy slows.

• Travel, retail, and entertainment are examples of cyclical sectors.

• Defensive stocks may provide more stable returns independent of economic trends, contrasting with cyclical stocks.

• Cyclical stocks can be subject to uneven short-term returns, but may offer long-term appreciation.

What Is a Cyclical Stock?

A cyclical stock is a stock that may perform differently depending on what part of the market cycle the stock market is in at a given time. These types of stocks tend to overlap with the broader economic cycle. As such, the stock market is not static; it moves in cycles that often mirror the broader economy. To understand cyclical stocks, it helps to understand how the market changes over time, with the understanding that this has a different impact on different types of stocks.

A single stock market cycle involves four phases:

Accumulation (trough)

After reaching a bottom, the accumulation phase signals the start of a bull market and increased buying activity among investors.

Markup (expansion)

During the markup phase more investors may begin pouring money into the market, pushing stock valuations up.

Distribution (peak)

During this phase, investors begin to sell the securities they’ve accumulated, and market sentiment may begin to turn neutral or bearish.

Markdown (contraction)

The final phase of the cycle stock is a market downturn, when prices begin to significantly decline until reaching a bottom, at which point a new market cycle begins.

Cyclical Stocks Examples

The cyclicality of a stock depends on how they react to economic changes. The more sensitive a stock is to shifting economic trends, the more likely investors would consider it cyclical. Some of the most common cyclical stock examples include companies representing these industries:

• Travel and tourism, including airlines

• Hotels and hospitality

• Restaurants and food service

• Manufacturing (i.e., vehicles, appliances, furniture, etc.)

• Retail

• Entertainment

• Construction

Generally, consumer cyclical stocks represent “wants” versus “needs” when it comes to how everyday people spend. That’s because when the economy is going strong, consumers may spend more freely on discretionary purchases. When the economy struggles, consumers may begin to cut back on spending in those areas.

Cyclical Stocks vs Non-cyclical Stocks

Cyclical stocks are the opposite of non-cyclical or defensive stocks. Noncyclical stocks don’t necessarily follow the movements of the market. While economic upturns or downturns can impact them, they may be more insulated against negative impacts, such as steep price drops.

Non-cyclical stocks examples may include companies from these sectors or industries:

• Utilities, such as electric, gas and water

• Consumer staples

• Healthcare

Defensive or non-cyclical stocks represent things consumers are likely to spend money on, regardless of whether the economy is up or down. So that includes essential purchases like groceries, personal hygiene items, doctor visits, utility bills, and gas. Real estate investment trusts that invest in rental properties may also fall into this category, as recessions generally don’t diminish demand for housing.

Cyclical stocks may see returns shrink during periods of reduced consumer spending. Defensive stocks, on the other hand, may continue to post the same, stable returns or even experience a temporary increase in returns as consumers focus more of their spending dollars on essential purchases.

Dive deeper: Cyclical vs Non-Cyclical Stocks: Investing Around Economic Cycles

Pros and Cons of Investing in Cyclical Stocks

There are several reasons to consider investing in cyclical stocks, though whether it makes sense to do so depends on your broader investment strategy. Cyclical stocks are often value stocks, rather than growth stocks. Value stocks are undervalued by the market and have the potential for significant appreciation over time. Growth stocks, on the other hand, grow at a rate that outpaces the market average.

If you’re a buy-and-hold investor with a longer time horizon, you may consider value cyclical stocks. But it’s important to consider how comfortable you are with investment risk and riding out market ups and downs to see eventual price appreciation in your investment. When considering cyclical stocks, here are some of the most important advantages and disadvantages to keep in mind.

Pros of Cyclical Stocks

Some potential advantages of investing in cyclical stocks include the following.

• Return potential. When a cyclical stock experiences a boom cycle in the economy, that can lead to higher returns. The more money consumers pour into discretionary purchases, the more cyclical stock prices may rise.

• Predictability. Cyclical stocks often follow market trends, making it potentially easier to forecast how they may react under different economic conditions. This could be helpful in deciding when to buy or sell cyclical stocks in a portfolio.

• Value. Cyclical stocks may be value stocks, which can create long-term opportunities for appreciation. This assumes, of course, that you’re comfortable holding cyclical stocks for longer periods of time.

Cons of Cyclical Stocks

Some potential disadvantages of investing in cyclical stocks include the following.

• Volatility. Cyclical stocks are by nature more volatile than defensive stocks. That means they could post greater losses if an unexpected market downturn occurs.

• Difficult to time. While cyclical stocks may establish their own pricing patterns based on market movements, it can still be difficult to determine how long to hold stocks. If you trade cyclical stocks too early or too late in the market cycle, you could risk losing money or missing out on gains.

• Uneven returns. Since cyclical stocks move in tandem with market cycles, your return history may look more like a rollercoaster than a straight line. If you’re looking for more stable returns, defensive stocks could be a better fit.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

How to Invest in Cyclical Stocks

When considering cyclical stocks, it’s important to do the research before deciding which ones to buy. Having a basic understanding of fundamental analysis and technical analysis can help.

Fundamental analysis means taking a look under a company’s hood, so to speak, to measure its financial health. That can include looking at things like:

• Assets

• Liabilities

• Price-to-earnings (P/E) ratio

• Earnings per share (EPS)

• Price/earnings ratio (PEG ratio)

• Price-to-book ratio (P/B)

• Cash flows

Fundamental analysis looks at how financially stable a company is and how likely it is to remain so during a changing economic environment.

Technical analysis, on the other hand, is more concerned with how things like momentum can affect a stock’s prices day to day or even hour to hour. This type of analysis considers how likely a particular trend is to continue.

Considering both can help you decide which cyclical stocks may be beneficial for achieving your short- or long-term investment goals.

The Takeaway

Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves. Cyclical stocks could be a good addition to your portfolio if you’re interested in value stocks, or you want to diversify with companies that may offer higher returns in a strong economy.

Investing in cyclical stocks does have its pros and cons, however, like investing in just about any other type or subset of securities. Investors should make sure they know the risks, and consider talking to a financial professional before making a decision.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

What are the four cycles of the stock market?

The market generally moves through four cycles: Accumulation, markup, distribution, and markdown, which may also be called trough, expansion, peak, and contraction. Note that it may take years for a single market cycle to complete.

What is the definition of “cyclical stock?”

Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves.

What are some examples of cyclical stocks?

Cyclical stocks may be shares of companies in industries such as travel and tourism, restaurants and food service, certain facets of manufacturing, retail, entertainment, or construction.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-120

Sep

2025

What Are Over-the-Counter (OTC) Stocks?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Are OTC Stocks?
How to Buy OTC Stocks
Types of OTC Securities
Types of OTC Markets
Pros and Cons of OTC Trading
FAQ

Most investors are familiar with ordinary exchange-traded stocks, but there’s another equity category known as over-the-counter stocks (OTC) — which aren’t necessarily available on public exchanges like the New York Stock Exchange (NYSE) or Nasdaq.

Rather, OTC stocks are traded through a broker-dealer network, known as OTC markets — which can include other types of securities, as well. The Financial Industry Regulatory Authority (FINRA) oversees broker-dealers that engage in OTC trading, but in general OTC markets are less transparent, and less regulated than public exchanges.

OTC stocks may include companies that are too small to trade on public exchanges, as well as some types of foreign securities, bonds, and derivatives.

Key Points

• Over-the-counter stocks are generally not available to trade on public exchanges, but some can be traded OTC as well as being listed on a national exchange.

• OTC stocks are traded through broker-dealer networks, also called OTC markets or Alternative Trading Systems (ATS).

• OTC markets are not limited to OTC stocks, but may include other types of securities: e.g., derivatives, corporate bonds, forex, and more.

• Certain OTC companies may be too small, or may not meet the criteria to trade on public exchanges.

• OTC markets tend to be less regulated than the public markets, and therefore less transparent, which can increase the risk of OTC trading.

What Are OTC Stocks?

As mentioned, an OTC stock is one that trades outside of a traditional public stock exchange. Although some OTC stocks may be available to trade either way.

Some OTC-traded stocks are exchange-listed, and some are unlisted (because they may not meet the criteria for the exchange).

A public stock exchange — like NYSE or Nasdaq — is a closely regulated environment in which buyers and sellers can trade shares of publicly listed companies. Before a stock can be listed on an exchange for public trading, it first has to meet the guidelines established by that exchange.

Companies may opt to trade shares in the over-the-counter market (meaning, they trade through a broker-dealer which typically relies on an Alternative Trading System, or ATS, to place trades) if they’re unable to meet the listing requirements of a public exchange. OTC trading may also appeal to companies that were previously traded on an exchange but were later delisted.

How to Buy OTC Stocks

Investors interested in purchasing OTC stocks may not need to change their investing strategy much, because depending on the exchange or platform they use to buy listed investments, they may be able to buy OTC stocks in much the same way.

Again, this will largely depend on the platform being used, but many — but not all — exchanges or platforms allow investors to trade OTC stocks. This can be done by searching for the OTC stock on the platform and placing an order. Investors may need to know the specific stock ticker they’re looking for, however, so there may be a bit of initial homework involved.

Types of OTC Securities

OTC trading tends to focus on equities, i.e. stocks.

One common type of stock available OTC is penny stocks, which tend to be higher risk. These small- or even micro-cap companies have less transparency because they don’t have to meet certain requirements for public exchanges. In addition, they tend to trade at low volumes, which makes these shares less liquid, and contributes to volatility.

But stocks don’t make up the entirety of OTC trading activity. Other types of investments that can be traded OTC include:

• Certain types of derivatives

• Corporate bonds

• Government securities

• Foreign currency (forex)

• Commodities

Altogether, there are thousands of securities that trade OTC. These can include small and micro-cap companies, large-cap American Depositary Receipts (ADRs), and foreign ordinaries (international stocks that are not available on U.S. exchanges).

Companies that trade over the counter may report to the SEC, though not all of them do.

Types of OTC Markets

In the U.S., the majority of over-the-counter trading takes place on networks operated by OTC Markets Group.

This company runs the largest OTC trading marketplace and quote system in the country (the other main one is the OTC Bulletin Board, or OTCBB). While companies that trade their stocks on major exchanges must formally apply and meet listing standards, companies quoted on the OTCBB or OTC Markets do not have to apply for listing or meet any minimum financial standards.

OTC Markets Group organizes OTC stocks and securities into three distinct markets:

• OTCQX

• OTCQB

• Pink Sheets

OTCQX

OTCQX is the first and highest tier, and is reserved for companies that provide the most detail to OTC Markets Group for listing. Companies listed here must be up-to-date with regard to regulatory disclosure requirements and maintain accurate financial records.

Penny stocks, shell corporations, and companies that are engaged in a bankruptcy filing are excluded from this grouping. It’s common to find stocks from foreign companies (e.g. foreign ordinaries) listed here.

OTCQB

The middle tier is designed for companies that are still in the early to middle stages of growth and development. These companies must have audited financials and meet a minimum bid price of $0.01. They must also be up-to-date on current regulatory reporting requirements, and not be in bankruptcy.

Pink Sheets

The Pink Sheets or Pink Open Market has no minimum financial standard that companies are required to meet, nor do they have reporting or SEC registration requirements. These are only required if the company is listed on a Qualified Foreign Exchange.

Be forewarned: OTC Markets Group specifies that the Pink Market is designed for professional and sophisticated investors who have a high risk tolerance for trading companies about which little information is available.

Pros and Cons of OTC Trading

Investing can be risky in general, but the risks may be heightened with trading OTC stocks. But trading higher risk stocks could result in bigger rewards if they deliver above-average returns.

When considering OTC stocks, it’s important to understand how the potential positives and negatives may balance out — if at all. It’s also helpful to consider your personal risk tolerance and investment goals to determine whether it makes sense to join the over-the-counter market.

Trading OTC Stocks: Pros and Cons
OTC Stock Trading Pros	OTC Stock Trading Cons
Over-the-counter trading may be suitable for investors who are interested in early stage companies that have yet to go public via an IPO.	Micro-cap stocks and nano-cap stocks that trade OTC may lack a demonstrated performance track record.
Investing in penny stocks can allow you to take larger positions in companies.	Taking a larger position in a penny stock could amplify losses if its price declines.
OTC may appeal to active traders who are more interested in current pricing trends than fundamentals.	Limited information can make it difficult to assess a company’s financials and accurately estimate its value.
OTC trading makes it possible to invest in foreign companies or companies that may be excluded from public exchanges.	OTC securities are subject to less regulation than stocks listed on a public exchange, which may increase the possibility of fraudulent activity.
	OTC stocks may be more illiquid than stocks traded on a public exchange, making it more difficult to change your position.

The Takeaway

OTC stocks are those that trade outside of traditional exchanges like the NYSE or Nasdaq, and rely on a network of broker-dealers to conduct trades. The OTC market gives you access to different types of securities, including penny stocks, international stocks, derivatives, corporate bonds, and even cryptocurrency.

If you’re interested in OTC trading, the first step is to consider how much risk you’re willing to take on, and how much money you’re willing to invest when trading stocks. Having a baseline for both can help you to manage risk and minimize your potential for losses.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

How do OTC stocks differ from stocks listed on major exchanges?

OTC stocks aren’t listed on major U.S. stock exchanges. They can still be traded via broker dealer networks; but how they’re listed (or not listed) is the primary differentiator.

How can I buy or sell OTC stocks?

Many investors can use their preferred brokerage or platform to buy and sell OTC stocks. Not all brokerages or investment platforms allow investors to do so, but many do, and trading them often involves searching for the appropriate ticker and executing a trade.

Are there any specific regulations or reporting requirements for OTC stocks?

There are reporting standards for OTC stocks, but those standards are not as stringent as listed stocks. Depending on the OTC market on which an OTC stock trades, more or less reporting may be required.

What are the main factors to consider when researching OTC stocks?

Investors should consider many factors in the OTC market, but among them are volatility, liquidity and trading volume, and applicable regulations. These three factors may have the biggest impact on how an OTC stock performs going forward, though that’s not guaranteed.

Are there any restrictions or limitations on trading OTC stocks?

The OTC markets don’t usually come with many restrictions. But public exchanges, brokerages, or platforms might not permit investors to trade OTC stocks or securities. In that case, investors can look for another platform on which to execute trades that does allow OTC trading.

About the author

Rebecca Lake

Photo credit: iStock/JohnnyGreig

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

CRYPTOCURRENCY AND OTHER DIGITAL ASSETS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOIN-Q325-071