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Initial Public Offerings (IPOs)

Find out what initial public offerings (IPOs) are, learn how they typically work, and see what to watch out for before you invest.

What is an IPO?

First public sale of stock (shares) by privately owned company.

Allowing the company to become publically listed on a recognised stock exchange, e.g. the London Stock Exchange (LSE).

Offering investors the chance to buy shares in the company before they become tradable on the secondary market.

Why would a company go public?

Smaller Companies

To raise capital to expand

To generate mich wider brand awareness

Larger Companies

To increase their investor base

To rause capital to make acquisitions

To raise capital to restructure their finances.

Interesting IPO facts

The world’s first ever IPO was the Dutch East India Company’s public offering of stock in 1604.1

The world’s biggest IPO to-date, by value, was Alibaba’s Initial Public Offering on the New York Stock Exchange in 2014 which raised £25bn.2

In 2016, 69 companies launched an IPO with the London Stock Exchange, raising over £3.5bn.3

How do IPOs work?

IPOs typically work like this

 

1. The company announces its intention to float.

This is a formal announcement to a stock exchange, such as the LSE, which typically includes:

Details of the company’s business and performance to date

Details of who can invest - i.e. retail investors or institutions

Basic details of the IPO.

 

2. The IPO will officially open for investment when the company publishes the offer documents, such as the offer prospectus, and pricing notification.

These documents, along with anything else published to support the offer, will detail comprehensive information about:

The company, including its plans for the future and the risks that might affect its performance

The indicative price range of the shares

The specific details of the company’s IPO.

If the IPO is being offered to retail investors, this is usually when you can apply for shares. This is done through an approved intermediary participating in the offer, for example, Barclays Smart Investor.

3. The IPO will usually close at the date specified in the offer prospectus, although it could close early if demand is high.

Once the offer is closed, investors can no longer apply for shares. This allows the company to work behind the scenes in determining the offer allocation policy – the number of shares each investor will be allocated and any allocation rules.

4. The share price is confirmed and investors will be notified of their share allocation.

If demand exceeds supply, the shares might be priced towards the top end of the indicative price range, and investors may not get all the shares they applied for. In that case, the company will show how it is scaling back allocations via its allocation policy.

5. The company’s shares begin trading on the stock market, with investors able to buy and sell the shares freely.

The shares will have a buy/sell price made available, and the price of the shares will rise or fall depending on the levels of demand.

What to look out for

Before you invest in an IPO, there are some important things you should consider.

You should read the offer prospectus before you decide to invest.

This will give you important information about the company, its future plans, and the types of risks it might face.

Your application for shares is not guaranteed to be accepted.

If the shares are in high demand and offer is oversubscribed you may receive a lower share allocation than you applied for.

The value of investments can fall as well as rise and you may get back less than you invest.

The shares could begin trading on the secondary market at a lower price than what you paid for them in the IPO.

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