"Why did I receive fewer shares in an IPO, when I applied for more?" This is a question very frequently asked by new Freedom Finance clients who started trading IPO's. Let's explain how it works so that you could get more shares and invest in IPO's with maximum return.
The number of shares purchased during an IPO depends on supply and demand. Due to the number of IPO investors, the underwriters can only satisfy a part of the broker's order, as the amount of shares coming from our clients' orders alone may even exceed the share number for the entire IPO. This means you can receive shares worth a smaller amount than you specified in your order. This is fine, and you pay, of course, only for the shares you actually purchased. The remaining money will be credited back to your account immediately, and you'll be able to use them to trade other IPO's.
Allocation is the amount of IPO shares purchased divided by the order amount. Many IPO's have such small allocation as 1% to 5%, while some others may range from 10% to even 70%.
Client Rating and How It Impacts Allocation
Allocation is calculated individually depending on the client rating. The rating score is based on 5 point scale, where 1/5 is minimum rating and 5/5 is maximum. You can view your rating before applying to trade an IPO when you log into your account (go to the Orders section and move to Trading Orders > IPO Trading) or via Freedom24 mobile app. With higher rating, you can get larger allocation.
This point, which impacts the allocation more than others, assesses the liquidity of the securities included into the portfolio. IPO shares during the lock up period are considered not liquid.
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This is about your trading transactions: buying and selling shares, using your margin, buying forwards, and using subscription plans. Please note: IPO trading commission does not count.
IPO Trading Consistency
This means whether you invest more or less the same amount into all IPO's you trade.
Why Does One Need This Rating?
IPO access is a premium service by Freedom Finance. The rating system is designed toreward clients who see Freedom Finance as not only an IPO broker, but also a company providing full range of brokerage services and complying with the risk management requirements.
How Do I Increase My Rating?
If you have no trading history with Freedom Finance, your rating will be 0, and thus you'll only get a minimum allocation: as a rule, just one share, irrespective of the order amount. In order to increase your allocation, you need more trading activity according to the above criteria. For instance, you can get started by building a diversified portfolio of liquid securities.
The rating is updated automatically once any new IPO's come in, based on your account trading activity over the last three months.
Tips for New Clients
Even if you take part in every IPO with a minimum rating, you can get a good return on your investments, as the average return on IPO's recommended by Freedom Finance is 72% after the 93-day lock up, since 2012 (as of January 14, 2021). IPOs are launched with frequency: in 2020 alone, our clients could trade 79 of them.
While trading IPO's, you can still increase your trading activity based on the rating criteria.