So Where Are OTC Securities Traded, Exactly?

In the US, the majority of over-the-counter trading takes place on networks operated by OTC Markets Group. OTC Markets Group organizes OTC stocks and securities into three distinct markets: OTCQX, OTCQB, and Pink Sheets.

InvestHL Archives | Page 29 of 52

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

Over-the-counter stocks are not traded on a public exchange like the New York Stock Exchange (NYSE) or Nasdaq. Instead, these stocks are traded through a broker-dealer network.

Q: What Kind of Securities Trade on the Over-the-Counter Market?

OTC trading tends to focus on equities, i.e. stocks. Other types of investments that can be traded OTC include: derivatives, corporate bonds, government securities, foreign exchange (Forex), commodities, and cryptocurrencies.

Sep

2023

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

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

Over-the-counter (OTC) stocks are not traded on a public exchange like the New York Stock Exchange (NYSE) or Nasdaq. Instead, these stocks are traded through a broker-dealer network. Additionally, the over-the-counter market can also include other types of securities. The Financial Industry Regulatory Authority regulates broker-dealers that engage in OTC trading.

For investors, it can be important to understand the meaning of OTC stocks, and where these securities might fit into your portfolio before trading them.

What Are OTC Stocks?

As mentioned, an OTC stock is one that trades outside of a traditional public stock exchange. As such, in order to grasp OTC stock trading and how it works, it helps to have a clear understanding of public stock exchanges.

A stock exchange — like NYSE or Nasdaq — is a 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 (for example, a company that wants to be listed on the Nasdaq must meet the Nasdaq listing requirements).

Companies may opt to trade shares in the over-the-counter market (meaning, they trade through a broker-dealer) 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 have since been delisted.

Also, stocks that are traded on an exchange are called “listed stocks,” while those that trade OTC are often called “unlisted stocks.”

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

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. In fact, it’s even common to see penny stocks being traded over the counter, or used as a common example of an OTC security. But stocks don’t make up the entirety of OTC trading activity. Other types of investments that can be traded OTC include:

• Derivatives

• Corporate bonds

• Government securities

• Foreign currency (forex)

• Commodities

Altogether, there are thousands of securities that trade over the market. 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.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

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’re able to produce above-average returns.

When considering OTC stocks, it’s important to understand how the positives and potential 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 over the counter may lack a demonstrated track record of positive performance.
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.
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.
Trading cryptocurrency on an OTC exchange could help minimize hacking or security risks.	OTC securities are subject to less regulation than stocks listed on a public exchange, which may increase the possibility of fraudulent activity.
OTC trading makes it possible to invest in foreign companies or companies that may be excluded from being listed on a public exchange.	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. Since OTC stocks trade outside of traditional exchanges like the NYSE or Nasdaq, 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. Having a baseline for both can help you to manage risk and minimize your potential for losses.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

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

The primary difference between OTC stocks and stocks listed on major exchanges is exactly that: OTC stocks aren’t not listed on major U.S. stock exchanges. They can still be traded, however, 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?

Not really, other than an exchange, brokerage, or platform perhaps not allowing users or 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.

Photo credit: iStock/JohnnyGreig

SoFi Invest®

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

Sep

2023

Complete Guide to the Volume-Weighted Average Price Indicator (VWAP)

By Brian Nibley | Financial Independence, Growing Wealth, invest, Investing | Comments Off

The volume-weighted average price indicator (VWAP) is a short-term trend indicator used on intraday charts. It measures the average price of a stock weighted by trading volume and price, and shows up as a single line.

Professionals and retail traders alike can use the VWAP as a benchmark to aid their trading strategies by using this indicator to identify liquidity points, or as part of a broader trend confirmation strategy.

VWAP also helps determine the target price for a particular asset, helping traders determine when to enter or exit a position. VWAP restarts at the opening of each new trading session, and is thus considered a single-day indicator.

What Is Volume-Weighted Average Price (VWAP)?

The volume-weighted average price (VWAP) is a technical indicator that shows a security’s average price during a specific trading period, adjusted for trading volume. In effect, it’s a measure of demand for that security.

It’s similar to the moving average indicator (MA), but because VWAP factors in trading volume, it’s a clearer indicator of the security’s value.

VWAP is calculated as the total amount traded for every transaction (price x volume) and divided by the total number of shares traded.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Why Is VWAP Important?

VWAP is important to traders and financial institutions for a few reasons. They can use the VWAP in combination with different trading strategies because it helps determine whether an asset is over- or underpriced based on the current market.

VWAP also helps identify a target price for the security so traders can aim for the best exit or entry points, depending on the strategy they’re using.

This benefits day traders, but also comes into play during corporate acquisitions, or big institutional trades.

Accuracy

One reason traders use VWAP is because it removes some of the static around a security’s price movement, and thus this indicator can provide a more realistic view of a security’s price throughout the day.

Trend Confirmation

Traders can also use the volume-weighted average price to gauge the strength and momentum of a price trend or reversal. When a price is over the VWAP, it might be considered overvalued. When it’s below the VWAP it may be undervalued. Thus it’s possible to determine support and resistance levels using the VWAP.

Simplicity

In many ways VWAP is a quick and easy way to interpret a security’s price and trend, and decide whether to make a trade.

How Is VWAP Used in Trading?

As a trend indicator, VWAP adds more context to a moving average (MA). Since a moving average does not take volume into account, it could potentially be misleading when relatively big price changes happen on low volume, or if relatively small price changes happen despite large volume.

In addition, moving averages aren’t always helpful for short-term traders, because MA’s require longer time frames to provide good information. The VWAP is made to be a short-term indicator, as it involves one data point for each “tick,” or time period of a selected chart (each minute on a 1-minute chart, for example).
There are several ways that investors use the VWAP when trading.

Institutional Investors

Large institutional investors and algorithm-based traders use the VWAP to make sure they don’t move the market too much when entering into large positions. Buying too many shares too quickly could create price jumps, making it more expensive to buy a security.

Instead, some institutions try to buy when prices fall below the VWAP, and either sell or pause purchases when prices rise above the VWAP, in an attempt to keep prices near their average.

Retail Traders

Retail investors use the VWAP as a tool to confirm trends. As noted above, the VWAP indicator is similar to a simple moving average with one key difference — VWAP includes trading volume, as the name implies. Why does this matter?

Moving averages (MA) simply calculate average closing prices for a given security over a particular period (e.g., 9-day MA, 50-day MA, 200-day MA, etc.). Adding volume to an indicator helps confirm the potential strength of a trend.

How to Calculate VWAP

VWAP is a ratio that indicates the relationship between an asset’s price and its volume. When used as a technical indicator on a chart, the computer automatically calculates VWAP and displays it as a single line.
Investors can also calculate VWAP manually. The two main pieces of the equation include:

• Typical price + volume

• Cumulative volume

The formula for calculating VWAP equals the typical price (the average of the low price, the high price, and the closing price of the stock for a given day) multiplied by the number of shares traded in a given day, divided by the total number of shares traded (cumulative volume).

Calculated daily, VWAP begins when the markets open and ends each day when the markets close.

Calculating a 30-Day VWAP

The 30-day VWAP is equivalent to the average of the daily VWAP over a 30-day period. So, to calculate the 30-day VWAP, you would have to add up the daily closing VWAP for each day, then divide the total by 30.

How Do You Read a VWAP Chart?

As with most technical indicators, there are many different ways to interpret the VWAP. Some of the most common ways to use this indicator for price signals include establishing support and resistance, indicating a trend being overextended, or using VWAP in combination with a different indicator.

Support and Resistance

This might be one of the simplest and most objective ways to read a chart using VWAP. One method for reading a VWAP chart is to use the line as an indicator for short-term support and resistance levels. If prices break beneath support, this could indicate further weakness ahead. If prices break above resistance, this could indicate more bullish momentum is yet to come.

Support and resistance are commonly measured using historic points of price strength or weakness, but this becomes more difficult when time frames are very short. Traders may use a volume-weighted indicator like the VWAP to predict short-term moves.

Trend Overextended

When looking at the VWAP indicator on a short-term chart, there could be times when price action goes very far beyond the VWAP line.

If price quickly goes too far above the line on heavy volume, this could indicate that the security has become overbought, and traders might go short. If price quickly falls far below the line, this could indicate that the security has become oversold, and traders might go long.

Of course, there is a subjective component involved in determining the exact definition of “overextended.” Typically, however, investors assume that price tends to return to the VWAP line or close to it, so when prices go too far beyond this line one way or the other, they could eventually snap back.

Recommended: Understanding Stock Volatility

VWAP Plus MACD

As they do with many technical indicators, investors often use the VWAP indicator in conjunction with other data points.

Technical analysis can become more effective when using multiple indicators together. By confirming a trend in multiple ways, investors can feel more confident in their projections.

As an example, some traders like to look at the VWAP while also looking at the Moving Average Convergence Divergence (MACD).

If the MACD lines see a bullish crossover around the same time that prices become overextended to the downside beneath the VWAP line, this could indicate a buying opportunity. If the MACD shows a bearish crossover as prices stretch far above the VWAP line, this could indicate a good time to close out a trade or establish a short position.

Limitations of VWAP

The VWAP is useful for day traders because it’s based on that day’s trading data; it’s more difficult to use the VWAP over the course of many days, as that can distort the data.

VWAP is also a lagging indicator, so while it captures recent price changes, it’s less useful as a predictive measure.

Is VWAP Good for Swing Trading?

It’s impossible to explore the role of VWAP in trading without addressing swing trading with this indicator.

The VWAP tends to work well for short-term trading like day trading and short- to medium-term trading like swing trading, in which investors hold a position for anywhere from a few days to a few weeks.

Using the VWAP on a daily basis could potentially help swing traders determine whether to continue to hold their position. If a short-term chart consistently shows prices beneath the VWAP, this fact could combine with other information to help the trader decide when to sell.

A Cumulative Indicator

It’s important to note that VWAP is what’s known as a cumulative indicator, meaning the number of data points grows higher as the day goes on. There will be one data point for each measurement of time on a given chart, and as the day passes, these points accumulate.

A 5-minute chart would have 12 data points one hour after the market opens, 36 after 3 hours, and 84 by the time the market closes. For this reason, VWAP lags the price and the lag increases as time goes on.

The Takeaway

The volume-weighted average price (VWAP) is essentially a trading benchmark that captures the average intraday price of a given security, factoring in volume. It’s considered a technical indicator, and it’s important because it gives traders pricing insight into a security’s trend and value, making it most helpful for intraday analysis. It’s one data point among many that traders might use when devising their investment strategy.

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

FAQ

What is the difference between the volume-weighted average price and a simple moving average (SMA)?

The simple moving average or SMA just shows the average price of a security over a period of time. The volume-weighted average price, or VWAP, factors in the asset’s trading volume over the course of the day as well, thus giving investors more information about demand and price trends.

How do you use VWAP in day trading?

Day traders often use VWAP to determine the target price of an asset, the better to determine the entry and exit points for trades, based on their current strategy, whether long or short.

What is the difference between Anchored VWAP vs VWAP?

Traditional VWAP always starts with the opening price of the day (VWAP is primarily used as an intraday metric), whereas anchored VWAP allows the trader to specify a certain price bar where they want their calculation to start.

Photo credit: iStock/Pheelings Media

SoFi Invest®

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

Sep

2023

What Are IPO Proceeds?

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Initial public offerings (IPO) are a common tool for companies to raise capital, and the funds raised in an IPO are known as IPO proceeds.

When investors purchase IPO stocks, the company gets to keep the proceeds, after paying underwriters, the exchange, and others that helped with the IPO process.

By opening up to public investment, a previously private company can bring in significant funds that can be used for various activities, rather than turning to debt as a means of expansion.

Companies can use the capital brought in through an IPO in a variety of ways, but they must disclose their plans to investors.

Key Points

• Initial public offerings (IPOs) are a common tool for companies to raise capital, with proceeds known as IPO proceeds.

• Companies must disclose their plans to investors for how they will use the proceeds.

• Common uses for IPO proceeds include paying off debt; funding additional research and development; and general corporate purposes.

• Companies must file an S-1 with the Securities and Exchange Commission (SEC) to disclose how they intend to use the proceeds.

• While companies get to keep most of their IPO proceeds, a portion also goes to investment banks, accountants, lawyers, and others who helped them with the IPO process.

IPO Proceeds Defined

When a company holds an initial public offering (IPO) they must publish their plans for how they will use the proceeds. This helps investors understand how the company will use their money, and decide whether they agree with the company’s plans before they invest.

This is important because even though the IPO process is highly regulated, it’s also highly risky. Some companies that issue their stock for the first time can see the stock price soar; others can see it plunge. It’s also possible for the IPO to have an IPO pop, or price spike, before dropping. This kind of volatility is common to IPOs, which is why investors must proceed with caution.

Companies preparing for an IPO file an S-1, a several-hundred-page document, with the Securities and Exchange Commission (SEC) which includes a disclosure about the planned use of IPO proceeds.

They must also show investors a business plan. Potential investors can evaluate the business plan and see if they think they will receive a satisfactory return on their investment if they buy stock in that IPO.

While companies get to keep most of their IPO proceeds, a portion also goes to all investment banks, accountants, lawyers, and others who helped them with the IPO process, including valuing the company and setting an IPO cutoff price. According to PWC, underwriting fees alone eat up 3.5% to 7% of IPO proceeds.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

What Are IPO Proceeds Used For?

There are a few areas where companies tend to spend IPO proceeds. Generally companies mention multiple uses in their S-1 filings, and it may also be something that they discuss with investors during their IPO roadshow. These might include:

General Corporate Purposes

General corporate purposes is a very common area companies talk about in their use of proceeds statements. It is a broad category that covers a lot of uses such as capital expenditures, operating expenses, and working capital, and getting more money for this is a major reason that many companies go public. Companies can use this term to describe broad activities without going into detail about their plans.

This allows them to keep their plans private and also lets them keep their options open and decide exactly how to spend money at a later date. Some companies do go into greater detail about the meaning of their general corporate purposes statement.

Research & Development

Companies might also use proceeds from an IPO to fund research and development. They spend funds developing new products and services, which can take years and significant amounts of money. Since R&D is so expensive, it is a major reason companies choose to hold IPOs.

Without R&D, some companies might struggle to keep up with competition and stay relevant in their industry. Some companies go into detail about the types of R&D projects they plan to work on using IPO proceeds, while others keep their plans vague.

Company Growth

Companies often choose to hold an IPO to raise funds for company growth. Company growth plans often appear in their business plan, and can include capital expenditures, working capital, sales and marketing plans to help a company grow its reach and revenue.

Companies want to create long-term, sustainable growth so that a company can stay in business for a long time. Like other uses of IPO proceeds, companies may go into detail about their plans for company growth expenditures or they may keep their plans vague.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Acquisitions

Companies can use IPO proceeds to merge with or acquire other businesses, something that can be very expensive. Without holding an IPO a company might not have the funds required to complete an acquisition. Acquisitions and mergers can help a company grow their customer base, eliminate competition, and expand their product and service offerings.

When a company includes an acquisition in its S-1 filing, they must state which company they intend to acquire. If they don’t yet have a company in mind to acquire, they can just list acquisitions as one possible use of IPO proceeds. A company does not have to state the exact company they are interested in acquiring if it will harm the potential of the acquisition plan.

Some companies take a unique path to acquisitions using IPO proceeds, known as a “blank check” IPO or special purpose acquisition company (SPAC). Companies create a shell company that they take public with an IPO and then use the IPO proceeds to complete an acquisition.

Debt Repayment

Another common use of IPO proceeds is to pay off debt. By paying off any existing debts, companies no longer have interest payments, so they reduce their operating costs, and they can also gain access to more funds from loans. Although it can be beneficial to a company to pay off their debts, this use of IPO proceeds is not popular with investors.

Other uses of IPO Proceeds

In addition to the uses described above, there are many other ways companies can use IPO proceeds, including paying taxes and charitable actions.

SEC Requirements on IPO Proceeds

The SEC requires companies file a “use of proceeds” section in their S-1 IPO submission. The S-1 explains to investors the goals of the IPO and what the company plans to do following the IPO, including how they will use proceeds. Requirements for what must be included in the S-1 are fairly broad, so companies can choose how much to share with potential investors, and they have a lot of choice about how they can use IPO proceeds.

There are several specific requirements for what must be included in the S-1, a document scrutinized by investors as part of their IPO due diligence. The “use of proceeds” section must include a brief outline of how proceeds from an IPO will be used. The requirements for what the brief outline includes are broad, giving companies a lot of freedom in what they want to disclose. Companies are allowed to use broad statements about planned use of funds, such as listing the categories described above.

Later sections in the S-1 submission require companies to go into greater detail about spending plans if they plan to use funds for certain activities. Just because a company states they plan to use funds in a certain way doesn’t legally bind them to actually use the funds in that way. However, companies need to inform investors that plans may change later if that is the case.

The Takeaway

With many companies going public per year, knowing how a company is going to use its IPO proceeds — the funds earned from the public offering itself — is important if you’re thinking about investing in that company’s IPO. You can find that and other useful information about a planned IPO in a company’s S-1.

Common uses for IPO proceeds include paying off debt; funding additional research and development; general corporate purposes, and more.

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

Who gets the proceeds from an IPO?

When a company holds an IPO, they receive money from banks and institutional investors who have agreed to invest prior to the start of the IPO. The company receives proceeds from the initial sale of stock. Any money exchanged after the IPO from the sale of stock doesn’t go directly to the company.

What are secondary IPO proceeds?

Primary proceeds are those made from the initial sale of stock in an IPO. Secondary IPO proceeds are those made in the stock market following the IPO.

How does an IPO raise money?

An IPO raises money by offering shares of stock in a company to institutional and retail investors. When investors purchase those stocks, the company gets to keep the proceeds, after paying underwriters, the exchange, and others that helped with the IPO process.

Photo credit: iStock/Charday Penn

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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. IPOs offered through SoFi Securities are not a recommendation 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 SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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.

SOIN0623078

Sep

2023

What Is IPO Due Diligence?

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

As part of the IPO process, private companies must perform due diligence to ensure that they’ve met all the requirements for being listed on a public exchange. This ensures that the company follows all registration and disclosure guidelines established by the Securities Act of 1933.

Broadly speaking, IPO due diligence is similar to the due diligence performed in any other situation involving large amounts of capital. Just as an investor may research certain aspects of a company before deciding to purchase shares, a company that’s planning an IPO must have an understanding of the various factors that could positively or negatively affect its success.

If you’re interested in investing in IPOs, it’s helpful to know what goes on behind the scenes and how the IPO due diligence process works, given that IPO stocks are considered high-risk securities.

Recommended: How to Buy IPO Stocks

Key Points

• IPO due diligence is a process of researching a private company to make sure it meets the requirements for being listed on a public exchange.

• The due diligence process involves gathering information about the company’s organizational structure, licensing and taxes, board and employee information, financial information, customer/service information, and company property.

• Benefits of IPO due diligence include an opportunity to explore the viability of an IPO for the company and more information for investors on the company and its risks.

• Steps to filing an IPO include SEC review, IPO roadshow, pricing, launch, stabilization, and transition to market.

• Due diligence can help give investors confidence that the company complies with all relevant SEC regulations.

IPO Due Diligence Process

IPO due diligence typically takes place within the first 60 days of a company beginning the IPO process. During the IPO due diligence process, the IPO underwriters and IPO attorneys will work together to perform the necessary background research to gain a better understanding of the company, its management and its financials. This involves gathering the follow information:

1. Organizational Data

During the first stage of the IPO due diligence process, the underwriters and attorneys gather information about the company’s organizational structure. This may include requesting copies of any or all of the following:

• Articles of incorporation

• A list of the company’s shareholders and committees

• An overview of the number of shares owned per individual shareholder

• Annual business reports for the previous three years

• Company business plans or strategic plans

• A breakdown of the company’s organizational structure, including board members, directors, and employees

The underwriting team may also request a copy of a certificate in good standing from the State Secretary, along with information on organizational decision-making.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

2. Licensing and Taxation

The next step in IPO due diligence involves collecting information about the company’s licensing and taxes. At this stage, the IPO underwriter and/or attorneys may request copies of:

• All business licenses currently issued to the company

• Annual tax returns

• Government licenses and permits held by the company

• Employment tax filings

• Comprehensive reports of the company’s tax filing data

The underwriting team may look back three years or more when analyzing income tax returns and tax filing information.

Recommended: The IPO Process

3. Board and Employee Information

Due diligence can also extend to information about the company’s board of directors, its managers, and its employees. At this phase of IPO due diligence, underwriters and attorney may request:

• A list of all individuals it employees

• Information about employee status, including each employee’s position and salary

• Details regarding employee benefits and bonuses, according to position

• A copy of company policies relating to sick leave or conflict resolution

• Details about employee insurance benefits, including health, disability and life insurance

• Copies of resumes for leading personnel

• Copies of employee audits

With regard to employee audits, underwriters can look back two to three years.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

4. Financial Information

A company’s finances can come under close scrutiny during the IPO due diligence process. When considering financial information, the IPO underwriting and legal team may review:

• Copies of broker or investment banking arrangements

• Company financial statements records, including previous financial audits

• A list of all financial accounts help by the company

• Copies of financial analyst reports

• Information about the company’s inventory holdings

• Details regarding the company’s accounting and amortization methods

• A list of all fixed and variable expenses

The time frame for which underwriters can review financial information can stretch from the previous three to five years, depending on what they’re examining.

Recommended: How to Read Financial Statements

5. Customer/Service Information

Due diligence also takes into account interactions with customers and service practices. During this step, the underwriting team may request:

• Reports or information about the products and services offered by the company

• Details about consumer complaints filed against the company

• Information about legal approvals for the company’s products and services

• Copies of the company’s trading policies

• Details regarding the company’s marketing strategies as well as copies of marketing materials

The underwriters may also need to see copies of customer supply or service agreements.

6. Company Property

Last but not least, IPO underwriters will examine property holdings owned by the company. This can include reviewing information about:

• Business locations

• Real estate agreements and/or franchise licenses

• Trademarks and copyrights held by the company

• Approved patents held by the company

• Trademark complaints, if applicable

• Official contracts showing the purchase of real estate

The underwriters may also ask for a full inventory of any physical or real property the company owns.

Objective of IPO Due Diligence

During due diligence, the underwriting team is working to gain a full understanding of how the company operates, how it’s structured, how healthy it is financially, and whether there are any potential issues that could be a roadblock to going public. The due diligence process effectively clears the way for the next steps in the IPO process.

The IPO due diligence process ensures that there are no surprises waiting to crop up that could derail a company’s progress. It’s also an opportunity for the underwriting team, the IPO attorneys and the company itself to assess any potential risk factors that may affect the IPO’s outcome.

Benefits of Due Diligence Process

IPO due diligence has benefits for both the company and investors.

IPO Due Diligence Benefits for the Company

• Due diligence offers an opportunity to explore the viability of an IPO, based on the company’s business model, financials, capital needs and anticipated demand for its shares.

• Due diligence also allows the company to avoid going afoul of regulatory guidelines, and it can help to identify any issues the company may need to address before going public.

IPO Due Diligence Benefits to Investors

• The due diligence process can reveal more about a company than the information in the initial red herring prospectus. In IPO investing, a red herring refers to the initial prospectus compiled for SEC registration purposes.

• If investors feel confident about the information they have, that could help to fuel the success of the IPO which can mean more capital raised for the company and better returns for those who purchase its shares.

Note that an investor’s eligibility or suitability for trading IPO shares is usually determined by their brokerage firm.

Next Steps in Filing IPO

Once the underwriting team has completed its due diligence, the company can move on to the next steps involved in how to file an Initial Public Offering (IPO). Again, that includes:

• SEC review

• IPO roadshow

• Pricing

• Launch

• Stabilization

• Transition to market

The SEC review typically takes between 90 and 150 days to complete. Now, it’s up to the SEC to determine that all regulatory requirements have been met. Usually, the team conducting the review includes one or more attorneys and one or more accountants.

Next, comes the roadshow. During the roadshow, the company presents details about the IPO to potential investors. This step of the IPO process allows the company and underwriters to gauge interest in the offering and attract investors.

IPO pricing usually involves a closer look at the company’s financials, including its valuation and cash flow. Underwriters may also consider valuations for similar competitors when determining the appropriate IPO price.

After setting the IPO price, the underwriters and the company will schedule the IPO launch. Once the IPO launches, investors can purchase shares of the company. The underwriter does the steering on price stabilization movements during the 25 days following the launch, after which the company transitions to market competition, concluding the IPO process.

The Takeaway

IPO due diligence is an important part of the IPO process. Thanks to due diligence, investors who want to purchase IPO stock can feel confident that a company about to go public complies with all relevant SEC regulations. Then, it’s up to the individual investor to decide whether trading IPO shares suits their goals and risk tolerance.

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

Photo credit: iStock/porcorex

SoFi Invest®

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

Sep

2023

How to Find Upcoming IPO Stocks Before Listing Day

By Anna Davies | Growing Wealth, invest, Investing | Comments Off

Accessing and purchasing a stock at its initial public offering (IPO) can seem like a VIP invite to a party. In addition to the cache of being “in the know” about potential opportunities, IPOOwing to the excitement that can accompany news of an upcoming initial public stock offering (or IPO), many investors seek ways to learn more about these companies prior to the listing day. Fortunately, there are many resources and services that track upcoming IPOs.

Using these IPO trackers, it’s possible to learn more about the status of various public offerings.

For investors interested in buying IPO stock prior to its actual public offering day, that can be more complicated. If a company launches an IPO, it means that it’s only had private investors, such as angel investors, up to that point but it’s now ready to let other investors purchase shares.

Key Points

• It’s possible to find upcoming IPO stocks before listing day with the use of resources such as media outlets, exchanges, brokerages and financial institutions.

• When people talk about getting IPO stock at IPO prices, they may be referring to the offer price available to a limited group of people, or the price available to all investors once the company goes public.

• Investors who plan to wait until the unlisted stock debuts may find themselves frustrated that there is little prep time before the stock appears on the market.

• When considering investing in a company as it goes public, investors should thoroughly vet the company and its financials and ask themselves questions such as whether they understand the business and the potential investment risks.

• While investing in IPOs can be exciting, they can also be risky and require active management and quick decisions regarding holding or selling.

When IPOs Are Offered to People Prior to Listing Day

When people talk about getting IPO stock at IPO prices, they may be talking about two things:

• The IPO offering price. This is a fixed price available to a limited group of people. This may include employees who were offered stock options as part of their compensation package, as well as certain investors who get access to the IPO fixed rate. This may be less than the share price set when the company goes public. All of these sales occur before trading day and can be tricky to navigate.

• The price of new IPO stocks once the company goes public. This is the price that is available to all investors and fluctuates based on market conditions.

Buying IPOs at their offer price can take some navigation, but that does not mean it’s impossible. Typically, offer prices may be offered only to certain brokerages.

One way that buying IPOs at offer prices differs from buying stocks already in the market: Only a certain number of shares are available to each brokerage, and they may be accessible to investors who have the highest account balances or meet other suitability requirements for trading IPO shares.

The trading process is also different: Instead of simply buying the shares, an eligible investor submits an indication of interest (IOI) letter. An investor’s ultimate buy order may be limited due to availability.

In part, this system evolved to protect investors who may be interested in IPO shares because of the headlines about fortunes made overnight. In reality, many investors have lost their fortunes when the IPO has not panned out.

💡 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.

How Do You Find Upcoming IPO Stocks Before Listing Day?

Investors who plan to wait until the unlisted stock debuts may find themselves frustrated that there is little prep time before the stock appears on the market.

The secrecy prior to an initial public offering reflects several factors: One is the registration process with the Securities and Exchange Commission (SEC). The company can not publicly sell or trade its stock until the SEC deems the registration statement effective.

Once the company has filed its registration, the company enters what’s known as a “quiet period” where it must adhere to restrictions on what and how much it communicates to the public.

Any “gun jumping” or public communication that nods or hints at an upcoming IPO may violate the Securities Act. But once a company registers with the SEC investors and stock market analysts will keep an eye out for the IPO.

So, beyond combing through the SEC database, how can an investor find new companies going public? There are many resources:

Media Outlets

Media outlets often report on upcoming and rumored IPOs. Reading through market news can be valuable for new and experienced investors alike, allowing them to have an enhanced perspective on how the market is evolving and which companies may be poised to IPO.

Exchanges

Exchanges, such as Nasdaq, also have trackers on upcoming IPOs, although these are IPOs likely to debut within the next several days.

Brokerage News

Brokerages and financial institutions may also report on industry news and trends and may publish IPO tracking.

Vetting Upcoming IPOs

With a range of IPOs taking place in some years, qualified investors will need to vet any potential offering before they decide to add it to their portfolio. If you’re considering investing in a company as it goes public, you’ll want to comb through all of its public documents to see whether its financials look sustainable. Then, ask yourself the following questions:

• Do I understand the business and the potential investment risks?

• Is the IPO underwriter a well respected, major investment firm?

• How are other companies in this space performing?

• Do the financials justify the IPO price and company valuation?

Recommended: How to Value a Stock

The Pros and Cons of Investing in IPOs

Access to IPO investing can be exciting. It can make an investor feel like they’re investing in dynamic companies that may be shaping the way we live and work. But they can also be risky. Some companies that may get a lot of media attention may fail to live up to investor expectations. Other companies may hit bumps in the road as they adjust to being a public company facing investor scrutiny.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Pros of Investing in an IPO

• It can be exciting.

• There’s potential for significant profits.

• It can allow investors to put their money behind a company they may value, believe in, or otherwise want to be a part of in some small way.

Cons of Investing in an IPO

• While there’s potential for reward, there’s also risk potential that the IPO may flop.

• Market fluctuations may require active management and quick decisions when it comes to holding or selling.

• The volatility of investing in an IPO may require portfolio calibration so that other investments are less volatile.

The Takeaway

While it may be possible to find upcoming IPO stock before listing day (more here), these shares are usually available only in certain circumstances to qualified investors. That’s partly owing to the careful regulation of the initial public offering process, but it also helps to protect eager investors from getting caught up in media hype and making a potentially risky investment on the spur of the moment.

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

Photo credit: iStock/solidcolours

SoFi Invest®

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

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

What Are OTC Stocks?

How to Buy OTC Stocks

Types of OTC Securities

Types of OTC Markets

OTCQX

OTCQB

Pink Sheets

Pros and Cons of OTC Trading

The Takeaway

FAQ

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

How can I buy or sell OTC stocks?

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

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

Are there any restrictions or limitations on trading OTC stocks?

Complete Guide to the Volume-Weighted Average Price Indicator (VWAP)

What Is Volume-Weighted Average Price (VWAP)?

Why Is VWAP Important?

Accuracy

Trend Confirmation

Simplicity

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

How Is VWAP Used in Trading?

Institutional Investors

Retail Traders

How to Calculate VWAP

Calculating a 30-Day VWAP

How Do You Read a VWAP Chart?

Support and Resistance

Trend Overextended

VWAP Plus MACD

Limitations of VWAP

Is VWAP Good for Swing Trading?

A Cumulative Indicator

The Takeaway

FAQ

What is the difference between the volume-weighted average price and a simple moving average (SMA)?

How do you use VWAP in day trading?

What is the difference between Anchored VWAP vs VWAP?

What Are IPO Proceeds?

IPO Proceeds Defined

What Are IPO Proceeds Used For?

General Corporate Purposes

Research & Development

Company Growth

Acquisitions

Debt Repayment

Other uses of IPO Proceeds

SEC Requirements on IPO Proceeds

The Takeaway

FAQ

Who gets the proceeds from an IPO?

What are secondary IPO proceeds?

How does an IPO raise money?

What Is IPO Due Diligence?

IPO Due Diligence Process

1. Organizational Data

2. Licensing and Taxation

3. Board and Employee Information

4. Financial Information

5. Customer/Service Information

6. Company Property

Objective of IPO Due Diligence

Benefits of Due Diligence Process

IPO Due Diligence Benefits for the Company

IPO Due Diligence Benefits to Investors

Next Steps in Filing IPO

The Takeaway

How to Find Upcoming IPO Stocks Before Listing Day

When IPOs Are Offered to People Prior to Listing Day

How Do You Find Upcoming IPO Stocks Before Listing Day?

Media Outlets

Exchanges

Brokerage News

Vetting Upcoming IPOs

The Pros and Cons of Investing in IPOs

Pros of Investing in an IPO

Cons of Investing in an IPO

Student Loan
Refinancing

Personal
Loans

Online
Investments