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Understanding IPOs

Clare interviews Alastair Thaw, Director at Smart Investor, on the subject of IPOs (Initial Public Offerings) – what they are, the advantages and disadvantages, and what you need to consider before deciding to invest.

The value of investments can fall as well as rise; you may not get back what you invest. If you’re not sure about investing, seek independent advice.

Clare: Hello, I'm Clare and welcome to Smart Investor, the show that can help you make the most from your investments. Please be aware that although we can't offer personal advice we're hoping each episode will provide you with the insight you need to make you a smarter investor. Today we're discussing something which can cause a lot of excitement among investors: IPOs, or Initial Public Offerings. This is when a privately owned business sells shares to the public for the first time and is listed on a recognised stock exchange. When a well-known company floats for the first time it can make headlines for instance Royal Mail, Pets at Home or Poundland. However, it's important not to get caught up in the hype. Just because a company is a household name it doesn't necessarily mean it's a good investment. Joining me to discuss these opportunities and explain more is Al Thaw, a Director at Smart Investor. Thanks for joining me, Al. So can we start by just explaining a bit more about what an IPO is?

Al: Hello, Clare. As you say, IPOs are a great opportunity for retail clients to get exposure to new companies that are coming to market and to buy their shares in the primary market. IPOs are one example of new issues generally that can also include bonds which is where a company issues debt that a retail investor can invest in for a coupon or interest payment or investment trusts that come to market or funds that issue new shares. It is an exciting opportunity.

Clare: And there is often a lot of hype in the media when a company is coming to float. What does that mean for investors? Why is that?

Al: Well, it's a great opportunity to invest in household names. Some of the companies you mentioned earlier, Royal Mail, Pets at Home, Poundland are recent examples of companies coming to market and allows an investor to get exposure to those companies before they launch on the stock market.

Clare: And there's a primary market and a secondary market, isn't there? Can you explain the difference?

Al: Yes. Why don't I talk through the stages of an IPO? Typically, a company will have an intention to float where they announce to the market they're going to float. That then builds up to an offer period where both retail and institutional investors can be part of that offering. There's a prospectus and other investment information and a pricing range that allow clients to decide whether to invest or not. That's the primary market. And once that is done, the company launches onto the secondary market or the stock exchange, where the shares become tradable.

Clare: And often a lot of people do choose to invest at this stage. What are the advantages and disadvantages of an IPO?

Al: Advantages can be that in buying in the primary market you might be buying at a more competitive price than when it launches on the stock market. That said, supply and demand and the other factors that go into making a price on the stock market may mean the price may not increase. In fact, it could fall. Another advantage is exposure to new companies. As we said earlier, getting into new companies that are coming to market before they're on the stock exchange is a good opportunity to build a portfolio or to add to an existing portfolio. And some of the demutualisations in the past and some of the government sell-offs were great opportunities for people to start investment portfolios. That said, it's really, really important not to just buy into a single stock but to manage your risk across your investment portfolio through diversification.

Clare: And is there anything else to bear in mind and consider if you're thinking about investing in an IPO?

Al: As we said, I think it's a really exciting opportunity but you must do your research. Don't go into these opportunities without looking at some of the super content that we have on Smart Investor to inform around this. Do your research, understand risk and in the case of Smart Investor maybe sign up for the email alerts that we have in this area.

Clare: Thanks very much for that, Al.

Al: Thank you, Clare.

Clare: Well, we hope you found that useful and that you now have another potential investment avenue to explore. If you'd like to find out more about IPOs or, as Al mentioned sign up for the latest alerts on the IPOs available through Smart Investor, visit the page on-screen now. But for today that's all so from Alastair and I, goodbye and we hope to see you again next time on Smart Investor.

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