Markets.com Logo
euEnglish
LoginSign Up

How does an IPO work and how do you trade in them?

Nov 14, 2023
11 min read
Table of Contents
  • 1. How does an IPO work?
  • 2. What an IPO involves
  • 3. Preparing for an IPO
  • 4. Selecting underwriters
  • 5. FCA registration and filing
  • 6. The roadshow
  • 7. Pricing and allocation
  • 8. Going public
  • 9. How to trade in an IPO situation
  • 10. IPO subscription process
  • 11. Secondary market trading
  • 12. Trading IPO CFDs
  • 13. Shorting an IPO
  • 14. What are some important considerations for IPO trading?
  • 15. Key takeaways 
  1. 1. How does an IPO work?

  2. 2. What an IPO involves

    1. 2.1. Preparing for an IPO

    1. 2.2. Selecting underwriters

    1. 2.3. FCA registration and filing

    1. 2.4 The roadshow

    1. 2.5 Pricing and allocation

    1. 2.6 Going public

  3. 3. How to trade in an IPO situation

  4. 4. What are some important considerations for IPO trading?

  5. 5. Key takeaways

 

 

How does an IPO work

 

IPO stands for Initial Public Offering. IPOs are an important aspect of the trading world and play a significant role in the growth and expansion of companies. Note IPO presents a prime opportunity to own shares in a public company and potentially profit from price movements.

However, the process of trading IPOs slightly differs from trading regular stocks. So it’s important to understand the nuances associated with trading these securities. 

So how does an IPO work? What does a company going public mean? And how do you go about trading IPOs?

This guide aims to provide a comprehensive understanding of an IPO — what it is, why it’s important, how it works, and what factors to consider when trading them.      
 

How does an IPO work?

So what does it mean for a company to go public? 

Simply put, a traditional IPO is the process through which a private company transitions into a publicly traded entity. It represents the first time that a company offers shares of its stock for sale to the general public.

An IPO filing marks a significant milestone in a company's growth trajectory. It enables the company to raise capital, increase its visibility, and expand its business operations.

If you need an example of an IPO, Google, Amazon, Apple, Microsoft, Facebook, and several other companies whose stocks are listed on global stock exchanges all went through an IPO process. Look how far they’ve come since then.

 

How much tech company stocks are worth after IPO
How much tech company stocks are worth after IPO till 2017 | Source: moneymorning.com

 

To a trader, an IPO is a great opportunity to own a part of the company early on. If the price of the company’s stock goes up, you make a profit; if it goes down, you make a loss.

That’s the basic gist of it, though there are a number of important considerations for various parts of the IPO, which we’ll cover later in the article.

 

What an IPO involves

The IPO process can be complex and time-consuming. Let’s break it down into key stages, so you have a better idea of what’s involved.

Preparing for an IPO

This is when a private company evaluates its readiness to transition to public ownership.

There are certain thresholds that a company must meet before it can file for an IPO. For one, it must be financially stable with a track record of consistent revenue growth and have a clear path to profitability.

The company must also demonstrate its willingness to adhere to regulatory compliance and good corporate governance practices.

Selecting underwriters

Here, the company must do due diligence by engaging the services of an IPO investment banking team or underwriter to manage the IPO process. 

This institution will help the company determine the IPO price, structure the offering, and market the shares to potential shareholders.

They also assist with the regulatory requirements and liaise with an authority, for example, the Financial Conduct Authority (FCA) in the United Kingdom.

FCA registration and filing

This registration includes information about the company's financial performance, management team, risk factors, and business plan. The FCA then thoroughly reviews the registration statement to ensure compliance with regulatory standards.

The roadshow

This is when the company, alongside its underwriter(s), meets with potential shareholders to discuss the plan to go public and answer questions. The goal here is to generate interest in the IPO and get traders to commit to the project by subscribing to the IPO for IPO financing.

Pricing and allocation

This deals with determining the IPO stock price and takes place before the company's stock launch. The price is set by an investment bank after consulting with the company management. 

The offering price is also influenced by factors such as market demand, trading demand, and the company's current valuation.

Going public

This is the day the company's shares are listed on a stock exchange to raise money. Traders can now officially begin buying and selling these shares. 

Like any other instrument traded in the financial markets, the price of the shares can fluctuate based on market demand and supply.

 

How to trade in an IPO situation

Participating in the debut of a newly listed company is often an exciting experience. But that excitement must come from a place of confidence in your knowledge about the stock, rather than from a place of naive hope and unrealistic expectations.

That said, there are three basic ways to trade IPOs — the IPO subscription process, secondary market trading, and IPO CFDs.

IPO subscription process

This is the initial phase of IPO trading, which happens when a company goes public. If you expressed your interest in purchasing shares of the newly listed company during the roadshow stage or in the offering period leading up to the IPO date, then you get your shares.

If you bought your shares before the official IPO date, you will be subject to the lock-up period, which usually lasts 90 to 180 days after the IPO. During this period, shareholders are restricted from selling the stock.

This is strictly a buying process — there’s no selling involved since the shares are coming to you directly from the company.

Sometimes you might not get the full amount of shares for which you subscribed. This usually happens when there simply aren't enough shares to go around. We call this situation an IPO oversubscription.

In this instance, the underwriters will allocate the available shares based on factors like the overall demand for the stock, subscription amount, time of subscription, and more.

Secondary market trading

So how does an IPO work for existing shareholders?

After the completion of the IPO subscription process, an individual investor can now decide on the number of shares to sell on the stock market. Interested traders who missed out on the IPO subscription can buy these shares.

 

How does an IPO work and how do you trade in them?
Image(s) published courtesy of: https://unsplash.com/

 

In the secondary market, the share price of the company is determined by the supply and demand of the stock.

 If private investors are rushing to buy it, then the price shoots up due to high demand and low supply. The reverse is the case if there is low demand and high supply.

Trading IPO CFDs

IPO Contracts for Difference (CFDs) are financial instruments that allow traders to speculate on the price movements of newly listed companies without owning the underlying shares.

An IPO CFD mirrors the price movements of shares of a company during its initial public offering. These derivative contracts are popular among traders due to their flexibility, leverage, and ability to profit from both rising and falling markets.

Although leverage allows you to buy a position with less money from your pocket, it is a double-edged sword that can result in huge gains, as well as substantial losses. Hence, it is best to proceed with caution.

Trading IPO CFDs means taking a position on whether you believe the IPO share price will rise or fall. If you anticipate a price increase, you enter a "Buy" or "Long" IPO position. On the flip side, if you expect the price to decrease, then you enter a "Sell" or "Short" position.

If the IPO share price moves in the direction that you anticipated, then you profit from the price difference when you close the position. However, if the price moves against your prediction, then you incur a loss.

That’s why it’s important to know how to understand the risks involved and have a solid trading plan in place before engaging in IPO CFD trading.

Shorting an IPO

You can short an IPO as soon as the IPO lock-up period ends. The lock-up period prevents too many shares from flooding the market within a short time frame.

Read Also: What is shorting in trading? (A comprehensive guide with examples, pros, and cons)

 

What are some important considerations for IPO trading?

  • Research: Do your research about the company and make sure that buying or selling IPO stocks aligns with your long-term trading goals.
  • Risk assessment: IPO trading can be risky given the limited historical data, the possibility of leverage, and uncertainties surrounding the company's future performance. There’s also market volatility to consider. So evaluate your risk tolerance and trade accordingly to your risk appetite.
  • Access to Information: Stay informed about the company's IPO details, financial performance, and any market news that may impact the share price. Conduct thorough research and analysis before trading IPO CFDs.
  • Market sentiment: The general sentiment about an IPO stock can have a significant impact on how well it performs in the market. Monitor market news, expert opinions, and trader sentiment to gauge market dynamics.
  • Trading tools: Prioritise the right trading tools. In an IPO, as it is the first time the company stock is being traded, there isn't enough data to perform technical analysis. As such, you’re better off evaluating the company’s fundamentals to gain insight into how the stock may perform in the weeks and months to come. 

 

Key takeaways 

  • An IPO is the process through which a privately held company offers its shares to the public for the first time.
  • Companies must meet requirements by exchanges and the FCA to hold an IPO.
  • IPOs provide companies with an opportunity to obtain capital by offering shares to the public.
  • Companies hire underwriters to manage the IPO process.
  • IPO trading involves two main phases: the IPO subscription process and secondary market trading.
  • During the IPO subscription process, you can express your interest in purchasing shares before they become available for trading on the secondary market.
  • You can also choose to trade IPO CFDs, which involve leverage and considerable risk. Choosing a reliable broker platform is key.
  • You can manage your IPO trading risks through risk assessment, a sound trading strategy, observing market sentiment, and using analytical tools.


 


Risk warning: CFD trading involves risk and may not be suitable for everyone. Ensure you fully understand the risks involved and seek independent advice if necessary. This blog post was written for educational purposes only and should not be considered financial advice.


Risk Warning: this article represents only the author’s views and is for reference only. It does not constitute investment advice or financial guidance, nor does it represent the stance of the Markets.com platform.When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. Trading cryptocurrency CFDs and spread bets is restricted for all UK retail clients. 

Markets.com Support Team
Written by
Markets.com Support Team
SHARE

Markets

  • Palladium - Cash

    chartpng

    --

    -1.26%
  • EUR/USD

    chartpng

    --

    -0.72%
  • Cotton

    chartpng

    --

    -0.30%
  • AUD/USD

    chartpng

    --

    -0.94%
  • Santander

    chartpng

    --

    -0.36%
  • Apple.svg

    Apple

    chartpng

    --

    -0.45%
  • easyJet

    chartpng

    --

    -0.83%
  • VIXX

    chartpng

    --

    -0.56%
  • Silver

    chartpng

    --

    -1.46%
Tags DirectoryView all
Table of Contents
  • 1. How does an IPO work?
  • 2. What an IPO involves
  • 3. Preparing for an IPO
  • 4. Selecting underwriters
  • 5. FCA registration and filing
  • 6. The roadshow
  • 7. Pricing and allocation
  • 8. Going public
  • 9. How to trade in an IPO situation
  • 10. IPO subscription process
  • 11. Secondary market trading
  • 12. Trading IPO CFDs
  • 13. Shorting an IPO
  • 14. What are some important considerations for IPO trading?
  • 15. Key takeaways 

Related Articles

CFD Trading Basics: Comparison MetaTrader 4 (MT4) and MetaTrader 5 (MT5)

CFD Trading Basics: Contract for Difference (CFD) trading has gained immense popularity among traders looking to capitalize on market fluctuations without owning the underlying assets.

Frances Wang|1 day ago

Union Pacific Stock Analysis: Why Union Pacific Corp Is Dropping?

Union Pacific Stock Analysis: Union Pacific Corporation, a major player in the North American rail industry, has recently faced a decline in its stock value.

Frances Wang|1 day ago

VisionWave Stock (VWAV) Surges: What Drives the VWAV Stock Prices?

VisionWave Stock (VWAV) Surges: VisionWave (VWAV) has gained significant attention in the stock market lately, with its stock prices surging. Investors and market watchers are keen to understand the factors influencing this upward trend.

Ghko B|2 days ago
Markets.com Logo
google playapp storeweb tradertradingView

Contact Us

support@markets.com+12845680155

Markets

  • Forex
  • Shares
  • Commodities
  • Indices
  • Crypto
  • ETFs
  • Bonds

Trading

  • Trading Tools
  • Platform
  • Web Platform
  • App
  • TradingView
  • MT4
  • MT5
  • CFD Trading
  • CFD Asset List
  • Trading Info
  • Trading Conditions
  • Trading Hours
  • Trading Calculators
  • Economic Calendar

Learn

  • News
  • Trading Basics
  • Glossary
  • Webinars
  • Traders' Clinic
  • Education Centre

About

  • Why markets.com
  • Global Offering
  • Our Group
  • Careers
  • FAQs
  • Legal Pack
  • Safety Online
  • Complaints
  • Contact Support
  • Help Centre
  • Sitemap
  • Cookie Disclosure
  • Awards and Media

Promo

  • Gold Festival
  • Crypto Trading
  • marketsClub
  • Welcome Bonus
  • Loyal Bonus
  • Referral Bonus

Partnership

  • Affiliation
  • IB

Follow us on

  • Facebook
  • Instagram
  • Twitter
  • Youtube
  • Linkedin
  • Threads
  • Tiktok

Listed on

  • 2023 Best Trading Platform Middle East - International Business Magazine
  • 2023 Best Trading Conditions Broker - Forexing.com
  • 2023 Most Trusted Forex Broker - Forexing.com
  • 2023 Most Transparent Broker - AllForexBonus.com
  • 2024 Best Broker for Beginners, United Kingdom - Global Brands Magazine
  • 2024 Best MT4 & MT5 Trading Platform Europe - Brands Review Magazine
  • 2024 Top Research and Education Resources Asia - Global Business and Finance Magazine
  • 2024 Leading CFD Broker Africa - Brands Review Magazine
  • 2024 Best Broker For Beginners LATAM - Global Business and Finance Magazine
  • 2024 Best Mobile Trading App MENA - Brands Review Magazine
  • 2024 Best Outstanding Value Brokerage MENA - Global Business and Finance Magazine
  • 2024 Best Broker for Customer Service MENA - Global Business and Finance Magazine
LegalLegal PackCookie DisclosureSafety Online

Payment
Methods

mastercardvisanetellerskrillwire transferzotapay
The www.markets.com/za/ site is operated by Markets South Africa (Pty) Ltd which is a regulated by the FSCA under license no. 46860 and licensed to operate as an Over The Counter Derivatives Provider (ODP) in terms of the Financial Markets Act no.19 of 2012. Markets South Africa (Pty) Ltd is located at BOUNDARY PLACE 18 RIVONIA ROAD, ILLOVO SANDTON, JOHANNESBURG, GAUTENG, 2196, South Africa. 

High Risk Investment Warning: Trading Foreign Exchange (Forex) and Contracts For Difference (CFDs) is highly speculative, carries a high level of risk and is not appropriate for every investor. You may sustain a loss of some or all of your invested capital, therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin. Please read the full  Risk Disclosure Statement which gives you a more detailed explanation of the risks involved.

For privacy and data protection related complaints please contact us at privacy@markets.com. Please read our PRIVACY POLICY STATEMENT for more information on handling of personal data.

Markets.com operates through the following subsidiaries:

Safecap Investments Limited, which is regulated by the Cyprus Securities and Exchange Commission (“CySEC”) under license no. 092/08. Safecap is incorporated in the Republic of Cyprus under company number ΗΕ186196.

Markets International Limited is registered  in the Saint Vincent and The Grenadines (“SVG”) under the revised Laws of Saint Vincent and The Grenadines 2009, with registration number  27030 BC 2023.

Close
Close

set cookie

set cookie

We use cookies to do things like offer live chat support and show you content we think you’ll be interested in. If you’re happy with the use of cookies by markets.com, click accept.