The 2020s have seen some big years for IPOs. 2021 was a bumper year – with over 100 new companies listing in the UK. In this guide, we explain what you need to know about IPOs. We also answer common questions such as “what is the IPO process?” and “why do companies go public?”.
An IPO or initial public offering is when a private company first offers shares to the public. The company and any original investors receive money in exchange for selling shares. An IPO is also known as a stock market flotation or a stock market listing. This is because the company will now be listed on the stock exchange.
IPOs work by selling a company’s shares to members of the public and institutional investors like pension schemes. It enables a business to raise a large amount of finance to help them expand. As a publicly listed company, the business may also find it easier to obtain debt finance and get good terms on borrowing.
If you buy shares in an IPO, you’ll get a chance to own those shares before they hit the stock market. This means you might benefit from your new stocks rocketing in price. However, making a profit isn’t guaranteed as shares prices of newly listed companies can be extremely volatile.
An IPO is often part of a business’s journey from a small startup to a large company. The business has probably had previous investments from a smaller number of private investors, such as family and friends, angel investors or venture capitalists.
Existing investors who own shares already can often make money from an IPO. This is because they can now sell the shares they own, hopefully for a large profit.
Here is the IPO process for a UK company that is listing on the London Stock Exchange:
Companies decide to go public for a number of reasons, including the following:
The following are some of the disadvantages for businesses deciding to float on the stock market:
You can buy shares in an IPO by investing through a share dealing platform. They will give information on upcoming IPOs and how you can invest. Some IPOs are only available to institutional investors, like pension funds.
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There are often rumours of IPOs long before an actual listing takes place. So how can you find out what IPOs are definitely available for investment in the near future?
Most companies make an “intention to list” statement to the stock market before the IPO. The announcement is usually published on websites that carry the London Stock Exchange trading news.
There are several news sources to find upcoming IPOs, including the following:
Many share dealing platforms also have information on upcoming IPOs and allow you to register an interest and invest through their platform.
Investing in IPOs can be fun as you will get to own part of a new exciting company. There is also the possibility of benefitting from a rocketing share price. However, not all IPOs are successful. Research from investment data website, Trustnet, found share price returns ranged from a 300% gain to an 85% loss for the 120 companies listed in the UK last year.
Most experts suggest that more risky investments, like IPOs, should only form part of your investment portfolio and should be balanced by less risky investments.
There are other, slightly less risky, options to investing in IPOs. Here are some of your options:
"Investing in IPOs is not for the faint-hearted. IPOs can be an extremely risky investment as newly listed companies tend to have a period of share price volatility.
However, some IPOs do see huge increases in share price, so there’s a great opportunity as well as risk.
If you do decide to invest in an IPO, then buckle your seatbelt because you may be in for an exciting ride."
Here are some pros and cons of investing in an IPO.
Investing in an IPO will enable you to buy a small part of a fledgling company with a big potential for growth. However, receiving a great return on your investment is not guaranteed. Returns on IPO investments last year varied significantly from a 300% gain to an 85% loss.
If you do decide to take the plunge , then make sure your IPO investment is part of a well-diversified investment portfolio. That means you’ll be able to spread your risk across many types of shares and asset classes.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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What makes a business a public limited company?
