What is an initial public offering (IPO) and how can you invest?

Initial public offerings (IPOs) often make headlines and are popular among investors.

We reveal what an IPO is, how to invest and the pros and cons. 

There are many examples of successful IPOs offering instant share price gains for investors. 

But it’s not an option to pursue without knowing the fundamentals, and things can go wrong, leaving you out of pocket.

What is an initial public offering (IPO)?

There are various reasons why a private company might decide to go public with an IPO. 

Current investors may want the opportunity to sell their shares, or it could be a way to raise extra capital for an expansion or acquisitions. 

But how do IPOs work? An IPO is when a private company offers its shares to the public for the first time. 

These shares are listed on a trading exchange like the London Stock Exchange (LSE) or the NASDAQ. This process is also known as ‘floating’.  

Once the decision has been made internally for a company to go public, a financial audit will take place. 

In the months before the planned listing, while the audit takes place and the company goes through the registration process, news of the IPO will usually be released. 

This is the ‘pre-marketing’ phase, which gives investors time to research the company and decide on whether they want to participate.  

To appeal to potential investors, companies often offer shares at an attractive price in the hopes of rewarding them with a rise in the share price on the first day of trading, although this is not guaranteed.  

How popular are IPOs?

IPOs have become increasingly popular over the last decade with activity peaking in 2021, with 54 UK IPOs occurring across the year. 

In 2022, IPO activity fell sharply in the UK. There were just 10 IPOs completed across the year, falling more than 80% from 2021.  

How do you find upcoming IPOs?

The more information at your disposal, the more likely you are to make a good investment decision, so it’s worth doing your research.   

This isn’t always easy, since there is often less information online on private companies than publicly traded companies.  

Online trading platforms will usually show a calendar with upcoming IPOs, as will trading exchanges like the London Stock Exchange, but these may only show a few weeks ahead. 

You could also read specialist investment sites and magazines to find out more about upcoming IPOs.  

How do you invest in an IPO?

If you want to participate in an IPO, you’ll likely be considered a ‘retail investor.’ 

In the three years leading up to 2020, just 7% of IPOs saw retail investors invited to participate. So, it can be a challenge to invest directly. 

That said, it’s not impossible, and investors can create a share dealing account to invest.  

There are also opportunities for private investors to subscribe to some IPOs via trading platforms. 

Investing in an IPO requires you to pay the full value of the stock upfront, giving you direct ownership of it. You’ll be a shareholder with benefits like voting rights and company dividends.  

What are the pros of investing in an IPO?

There are plenty of benefits to investing in an IPO. It offers individuals the opportunity to become a shareholder in their chosen company. 

IPO investors may be involved in stakeholder votes shaping how the company is run.  

When more established companies go public, it can be an exciting financial opportunity. 

For example, Facebook raised a record-breaking $16 billion through its offering. Around $5,000 worth of shares then would have been worth more than $25,000 by 2019. 

What are the cons of investing in an IPO?

While it’s true that many successful companies have gone public, scepticism is encouraged. 

As a potential investor, you won’t have the same amount of information about a private company as you would a public one.  

It’s also worth remembering that only a few IPOs invite retail investors to participate. In these cases, you should question why the shares haven’t already been snapped up by big-time investors.  

Investing in an IPO can be a risky business. The price that shares are initially sold at can attract investors and traders who may sell them quickly to make easy gains, causing share prices to fluctuate. 

The pre-marketing phase can generate significant hype that might see companies initially overvalued. 

IPO activity in 2023

In the first half of the year, IPO activity on the UK main market and the Alternative Investment Market (AIM) saw a drop of 31% in deal numbers, with 18 issuers raising £593 million according to EY. 

The most significant main market IPO in the first half of 2023 was Admiral Acquisition, which raised an impressive £439.8 million.  

Globally, the story was similar for the IPO market in the first half of 2023. 615 IPOs were recorded, a 5% decrease from the previous year’s period.

This saw $60.9 billion raised, a 36% fall in the same period.  

Before making significant financial decisions like investing in an IPO, it’s critical that you have the right information at your disposal and the correct advice to hand. 

If you’re looking for expert advice, Unbiased can connect you to an FCA-regulated financial adviser.