What are IPOs and how can you trade them?
When a company decides to go public, it may do so by making an Initial Public Offering, or IPO. Here, we take a look at what that means – and how you can start trading on a company going live for the first time.
What are IPOs?
Companies often do not start as publicly traded companies. They do not issue stock or may only issue shares to private shareholders.
However, many companies decide to go public. This means their stock will be listed on stock exchanges and be available for public trading. In theory, anyone could be a shareholder by purchasing shares in said company.
These tend to be some of the most exciting events for stock traders and investors. For instance, when Coinbase announced it was going public in February 2021, it created a wave of market interest.
There are a couple of different ways a busines can go public. One of the most popular is by making its Initial Public Offering.
There are a couple of reasons why a company may choose an IPO, including:
- Raise capital
- Pay off debts
- Monetise assets
- Improve its public profile
Once it goes live, the business’ stock will be available for retail traders and investors to buy and trade.
These tend to be medium-to-large cap companies. For example, when money sending service Wise was worth an estimated $5-9bn ahead of its IPO.
Smaller companies may use other methods to get access to public capital. The London Stock Exchange Alternative Investment Market (AIM), for example, is where small companies that have exhausted their private money, but are not at the level required of an IPO, can still be publicly listed.
How does the IPO process work?
The first part of an IPO is the audit. This is basically a review of all the company’s financial ins and outs.
The company will then have to file a registration statement with the relevant authorities. So, if a business were to launch on the London Stock Exchange, then it need to share its registration statement with the Financial Conduct Authority (FCA).
The stock exchange the company wants to list on will then review the business’ application. If successful, the company will move on and work with an underwriter to determine how many shares it should release to the public. If unsuccessful, it will have to go back, review its application, and try again.
The filing will also be read by traders and investors to get a flavour of a) the company’s financial health b) its IPO plans and c) what to possibly expect when it finally launches.
Generally, a business will work with an investment bank to determine its IPO share price, i.e., the price per share when the stock first goes public. Goldman Sachs was hired to price trading app Robinhood’s IPO, for example.
There is no set timeframe for an IPO. They require many different stakeholders and complex processes to reach fruition.
Trading or investing in an IPO
There are a couple of ways to trade and invest in a stock that’s gone public – even before the process is completed.
At Markets.com, we offer grey markets.
A grey market let’s use offer Contracts for Difference (CFDs) on a stock before it goes live. You can speculate on its price movements and estimated market cap up to the end of the stock’s first trading day.
A grey market CFD’s price will be determined by our pricing team, based on the company’s prior financial performance, its initial public offering filing, and predictions on how we think the stock will perform.
Trading is about speculating on price movements. CFDs allow you to do this without owning the underlying asset. These are leveraged products. That means you gain exposure for a fraction of the total trade’s value. However, profit and loss is gauged by the total size of your position, not your deposit, and can far outweigh your initial deposit. Your risk of loss is higher. Only commit capital if you can afford to take any potential losses.
Please note: a grey market will not be offered as an investment product. Investing is the act of buying shares to hold onto in the hope they gain value. Because the stock hasn’t actually launched yet, you would be unable to buy and hold a grey market CFD.
When the IPO launches
One the IPO goes public, you will be able to buy the stock to add to your investment portfolio. Alternatively, you will now be able to trade on its price movements using spread betting or CFDs in the manner mentioned above. To reiterate, you will not own the asset if you pursue a spread or CFD-trading strategy.
How do IPOs perform after launch?
That depends on a myriad of factors. Sometimes stocks come roaring out the traps. Other times, as was seen with Robinhood with its IPO launch, a company going public can be a bit of a damp squib and fall below market expectations.
The stock’s performance should also be gauged over different timelines.
We’ve split the table below into different stock categories to see how company shares tend to perform in their first day, first week, and first month after their first public offering.
The data represents a global overview for stocks in 2020, rather than IPOs stocks listed on a specific exchange. It also includes a comparison of IPO stocks against main market and AIM stocks.
||Price movement- first day
||Price movement – first week
||Price movement – first month
Where can you find out about upcoming initial public offerings?
Generally, each stock market will have a dedicated calendar or page detailing upcoming debut stock listings. Here are some examples
London Stock Exchange
New York Stock Exchange
We also inform our clients on upcoming IPOs. You can find more information in our news section.
A word on debut listings and risk
Please note that trading and investing carries with it the risk of capital loss. The value of your investments may go down. If you trade leveraged products like CFDs then you may encounter serious losses.
Do your research prior to committing any capital. Only invest or trade if you can afford to take any potential losses.