What is an IPO and how does it work?
For most traders and investors, an initial public offering (IPO) is the first opportunity to gain exposure to a company’s shares. Learn more about the IPO process and how to take a position with us.
What is an initial public offering (IPO)?
An initial public offering (IPO) is one of the methods that companies can use to go public – which will make its stock available to retail traders and investors. The company will decide how many shares it wants to offer, and an investment bank will suggest an initial price for the shares based on the predicted demand for them.
It should be noted that trading or investing in IPO shares can be riskier than getting exposure to established stocks, due to the unpredictability of the new listing.
Why do companies want to go public?
Companies want to go public for different reasons, depending on their circumstances. Most are looking to raise capital to fund expansion, pay debts, attract and retain talent, or monetise assets. A company may also want to list on a stock exchange to improve its public profile.
How does the IPO process work?
The IPO process starts when a company decides that it wants to sell its shares to the public via a stock exchange. First, an audit must be conducted, which considers all aspects of a company’s financials.
If everything is in order, the business then has to prepare a registration statement to file with the appropriate exchange commission, like the Securities and Exchange Commission (SEC) in the US or the Financial Conduct Authority (FCA) in the UK.
Next, the stock exchange that the company wants to list on will review the application, after which it’s either accepted – sometimes subject to certain amendments – or rejected. If it’s approved, the company will enlist the help of an underwriter to help it decide how many shares to issue and at which price.
The underwriter is usually a bank, and it’s their job to start a book building process, looking for investors to subscribe to (register their interest in) the IPO. Any interested parties will receive a prospectus of information about the shares, where they’ll be listed and the potential opening price.
The IPO will be the first chance for non-private investors to buy the company’s shares in what is known as the primary market – a transaction between the original holder (the company) and an investor.
There have been restrictions on IPOs that mean only institutional investors can participate fully in this primary market, while retail investors could only participate in the secondary market – when shares are exchanged between investors.
Who sets the IPO price?
Investment banks set the IPO price. The company decides how many of its shares it wants to sell to the public and then the nominated investment bank does a valuation of the business. Once that’s done, an initial share price is released, and the public can start trading shares when the listing happens.
Pros and cons of IPOs
Pros of IPOs
A successful IPO can raise huge amounts of capital, as becoming listed on a stock exchange can help to increase the exposure and public image of a company. In turn, the firm’s sales and profit can increase. IPOs are also beneficial to traders because it’s easier to buy publicly traded shares than those that only trade privately.
Cons of IPOs
Public companies are subjected to the rules and regulations of a governing body. One of the rules is that the company is required to publicly disclose financials, such as accounting information, tax and profits. IPOs also carry significant costs and could require the company to raise additional funding if its shares perform poorly.
Trading or investing in IPO shares can be riskier than getting exposure to established stocks, due to the unpredictability of the new listing.
How to trade or invest in an IPO
*Note: Primary market IPO trading is not available with us
Our exclusive grey markets enable you to take a position on a company’s market cap before it lists on a stock exchange.1 You’ll ‘buy’ (go long) if you think the company’s market cap will be higher than the grey market price at the end of the first trading day, or ‘sell’ (go short) if you think it will be lower.
To start trading grey markets, open a trading account with us.
Secondary market: buying the stock after the IPO – investing or trading
Once the stock has listed, the secondary market will open, which is where individual investors exchange the stock between themselves.
- It usually takes a few hours for stocks to be available after a US IPO, as is the case with all brokers
- All other IPOs we offer should be available right away, from the time the exchange opens on the day of listing
There are two ways for you to take a position on the secondary market following an initial public offering. You can:
How do companies perform after their IPO?
The tables below show how companies’ share prices performed after the first day, first week, and first month of their IPOs.
- First day
- First week
- First month
How long is the IPO process?
The length of the IPO process can vary, depending on how well it’s being managed and coordinated. The financial audit stage – which is the first stage of a company going public – can be the longest, especially if the company’s books are not in order.
To combat the time commitment of a traditional IPO, more and more companies are turning to alternative methods of going public, like SPACs – which can be considerably faster.
How do I find new IPO stocks?
To find new IPO stocks, you can look at our upcoming IPOs page – which has info on the most highly anticipated yet-to-list IPOs.
How much does an IPO cost?
The cost of an IPO for a company will depend on the registration requirements of the stock exchange where it’s being listed. In addition, there will generally be underwriting fees and offering costs, as well as legal and accounting fees. Larger companies could face additional costs when preparing to list.
How is the IPO price calculated?
The IPO price is calculated by an investment bank. First, the company decides how many of its shares it wants to sell to the public. Then, the nominated investment bank does a thorough valuation of the business. Once that’s done, an initial share price is released, and the public can start trading shares when the listing happens.
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1 We do not offer grey markets on all IPOs