Take a position on a company before the Initial Public Offering (IPO)
An initial public offering (IPO) is when a company goes public on a stock exchange and lists their first sale of stock. This can also be known as floating, flotation, or just ‘going public’.
‘Going public’ means a company is switching from private ownership to public ownership. If a company has never issued equity to the public, it’s known as an IPO.
When a company wants to go public, it hires an investment bank to underwrite the IPO. Underwriting is the process of raising money, either by debt or equity (in this case we’re referring to equity).
The first step involves the negotiation of the deal between the company and the investment bank. Items usually discussed include the amount of money a company will raise, the type of securities to be issued and other particularities mentioned in the underwriting agreement.
Once all sides agree to a deal, an initial Draft Offer Document (Prospectus) must be filed with the Australian Securities and Investment Commission (ASIC). This document contains all the relevant information investors would require to make an informed decision about investing in the company.
A portion of the shares on offer will be allocated to customers, investors, or to the general public. If you are entitled to apply, you can do so by completing the form in the Prospectus or via your stockbroker.
Once applications have been received, the allocation of shares granted to each underwriting firm involved in the IPO is confirmed.
The shares will then be listed on the stock market when allocations have been made and applications have been received. Once listed, you can trade the company’s shares as per usual, keeping in mind that their price can increase or decrease depending on market conditions.
On 2 March, Snap Inc. went public on the New York Stock Exchange. The tech giant was valued at $28 billion at the end of its first day of trading, with its share price having rocketed from a guide price of $17 to a closing price of $24.48.
Facebook's wariness of the threat posed by its Silicon Valley neighbour has proved entirely justified. With the $3.4 billion share sale alone, Snapchat co-founders Evan Spiegel and Bobby Murphy already surpassed the buyout offer Facebook CEO Mark Zuckerberg once made them. By holding out, they have achieved the largest IPO since Alibaba’s in 2014.
Announced back in early February, Snapchat’s IPO appeared ambitious, even after the photo-sharing company lowered its original valuation expectations to $22 billion. The five-year-old company’s revenue increased by 600% in 2016, but there have long been questions over a business model that anticipates substantial future operating losses and foregoes profitability. Muddying the waters further still was the choice not to sell voting shares, meaning its executive board would still keep total control of the entire company even with public funds.
Clearly this did little to deter investors. The question now is whether the optimism will pay off. In the lead-up to the flotation, analysts used Twitter and Facebook as touchstones by which to assess Snapchat. But both of these companies’ fortunes have diverged in dramatic ways since going public, making it hard to know if investor confidence will prove justified in the long term.
What is a grey market?
IPO grey markets offer a grey market on a company having an IPO, rather than clients actually participating in the IPO by purchasing shares through the application process.
By taking a position on a grey market, you’re taking a position on a company’s potential market cap ahead of its IPO (total shares in issue x price).
If you think the estimated value of the company is over- or under-priced, or if news stories surrounding the business creates additional volatility, a grey market enables you to take advantage before the shares are released publically on the stock exchange.
How does a grey market work?
Our grey market works the same as any other CFD: find it in our ‘Popular markets’ watchlist, and buy or sell to take your position.
How is a trade on our grey market settled?
Settlement of your trade is calculated based on the official closing price of the first day of trading, as reported by Bloomberg.