What happens on the day of an IPO?
Entry posted by MongiIG in Analyst Piece
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Your comprehensive guide to what an IPO is, what happens on the day of an IPO, and the difference between the primary and secondary markets. Learn how to get started.
Source: Bloomberg
What is an IPO?
An Initial Public Offering (IPO) is when a private company sells its shares to the public for the first time. This allows the company to gain access to investor capital, which would be markedly harder if it had remained private.
While an IPO is often the first time shares have ever been made available, it's also common for larger companies already listed in the country to dual-list, or de-list and re-list, by launching an IPO in another state. Alternatively, it's also normal for small caps listed on the AQSE to launch an IPO on the AIM market after they have reached regulatory milestones.
The shift from private to public is often an important time for private investors as it usually comes with a share price premium and increased liquidity to offload shares. However, pre-IPO investors are often contractually sealed into a 'lock-up' period, whereby they cannot sell any shares for a length of time after the public launch.¹
Companies in the UK seeking to launch an IPO must meet the regulatory requirements imposed by bodies such as the Financial Conduct Authority. These can vary; for example, AIM listings have less strict conditions than on the main market.
As part of the pre-launch process, businesses almost always hire an investment bank to do some of the heavy lifting, such as marketing and gauging demand to help set the initial price and date of launch.
What happens on the day of an IPO?
An IPO day occurs over two defined stages.
1. The primary market – Here, investors who have subscribed to an IPO or registered their interest in the listing receive their allotment of shares before the market opens. The process takes place between the company and these investors through an underwriter – typically a bank. Once the lock-up period has passed, these investors are usually free to sell their new holdings, just like any other share.
In the past, primary markets were only open to institutional investors. Nowadays, companies like ours offer primary market access so you can buy stock pre-IPO at the listing price.
2. The secondary market – Excepting the US, after the primary market concludes – and usually on the same day – shares start trading on the open market. At this point, shares can be bought and sold freely by members of the public through their stockbroker. UK and most international shares are available with us to trade immediately.
As always with the stock market, there is a special case to consider. From the first day of the IPO, some companies' shares enter a phase that typically lasts three days. This is known as 'conditional trading'. During this stage, all share purchases have deferred settlement, meaning there is no guarantee that your placed trade will be honoured.
There are good but complex risk-based reasons why this happens. But once unconditional trading starts, shares can then be traded freely.
Remember: those who invest in the IPO through the primary market are often subject to a 'lock-up' period. While primary market prices can sometimes be had at a slight discount, investors must weigh this advantage against the common restriction.
What is an IPO price?
Put simply, the IPO price is the value that the company and its underwriter set for the stock to begin trading on the open market. A common misconception is that this figure must match the target price given in the IPO prospectus, but this is not the case.
Investors should take care to check for any discrepancies before placing a trade. If the starting price is set higher than the previously given target price, it may be that interest in the shares has surged and the company thinks it can make more money. This is common when smaller companies conduct an IPO, as it sometimes takes the publicity of a listing for analysts to release their opinions.
Factors including demand, industry comparables, growth prospects, finances or even a unique selling point all influence the final IPO price. A good example of a strong launch is Alibaba's 2014 IPO. In-demand diversified technology, an announcement to tap into European and US markets in addition to China, and the surprising choice to debut on NYSE instead of NASDAQ made this IPO shatter all previous records.
However, just like pricing any other asset, setting too high a price can be a disaster. Deliveroo's London IPO was meant to be the largest in over a decade but was a corporate mess – falling from an opening price of 390p to just 284p at the close.
Accordingly, many companies choose to slightly under-price their initial shares, as this can tempt investors with a healthy risk appetite to the primary market.
What time do IPOs start trading?
IPOs will start trading at varying times, depending on the stock exchange in which the listing is taking place. As a general rule, UK stocks should become available to retail investors at 8am and US stocks at 2.30pm (Western European Time). However, ubiquitous red tape means that US stocks are often delayed, so this should be expected.
Stocks listing on the London Stock Exchange usually reveal their IPO price at 7am. Timings vary by country – India IPO securities typically begin trading at 10am. Anecdotally, they tend to be more timely, so this may become standard practice.²
Investors can only access the IPO price in the primary market. We offer this for the vast majority of UK listings in which the company offers the IPO price to retail investors. Again, you must subscribe to the IPO before the launch to receive your stock allocation.
We offer immediate access to the secondary market for most IPOs across the UK, Europe and Asia. Access to US IPO secondary markets can take several hours, though this is by system design for UK brokers like us.
Key market IPO launch times (UK time)
- London Stock Exchange (UK) 8am
- New York Stock Exchange (US) 2.30pm, but may take some hours to be tradeable
- NASDAQ (US) 2.30pm, but may take some hours to be tradeable
- Germany 9am
- France 8am
How to trade or invest in IPOs with us
- Research the company to make sure that it fits with your strategy and goals
- Create your account with us
- Decide whether you're taking your position on the IPO primary or secondary market
- If you want to invest in the primary market, choose share dealing
- To take a position on the secondary market, choose share dealing to buy the stock or trade using spread betting or CFDs
- Place your trade
Remember, trading with spread betting or CFDs comes with added risk attached to leverage. Your position will be opened at a fraction of the value of the total position size – meaning you can gain or lose money much faster than you might expect. When share dealing, you buy and own the shares, so you aren't exposed to this risk.
Frequently asked questions about IPOs
Advantages of an IPO include:
- Access to more capital through the wider investing public
- Increased exposure, public image and prestige
- Increased transparency from quarterly reporting
- Often better borrowing terms from creditors
- Ability to raise additional funds through secondary offerings
Disadvantages of an IPO include:
- IPOs are costly
- Maintaining a public company comes with additional expenses
- Share price fluctuations can distract management from making the best long-term decisions
- Risk-taking managers can feel stifled, especially given the increased paperwork
- Share prices sometimes do not reflect the true value of the company
- Listed companies must disclose business information that may help competitors
- Loss of agency occurs as new shareholders gain rights
A short history of IPOs
The very first 'modern' IPO was launched by the Dutch when shares of the Dutch East India Company were offered to the public in 1602. Over the years, IPOs have faded in and out of popularity, with periods of intense activity usually coinciding with technological innovation or loose monetary policy.³
For example, the dot-com boom of the early 2000s saw high levels of IPO activity as tech start-ups rushed to get liquidity – while the 2008 financial crisis saw listings drop to a record low and remained rare for some years.
Activity started to roar back with the ultraloose monetary and fiscal policies of the pandemic years, with investors focused on 'unicorns' – companies with a private valuation of more than $1 billion.
As policy has now tightened compared to recent norms, IPO activity may be dampened for some years. However, this also means that companies which do list will receive elevated interest.
IPOs summed up
- An Initial Public Offering (IPO)is a stock market process by which a private company begins offering shares to the public on a listed exchange in a new issuance for the first time
- Investors can buy shares on the primary or secondary markets, with some marked differences
- UK stocks usually become available to retail investors at 8am and US stocks at 2.30pm (Western European Time)
- The IPO price is the value that the company and its underwriter set for the stock to begin trading on the open market
- Companies benefit from access to more capital at better terms and public exposure, though must weigh these benefits against increased costs and some loss of agency
- We offer access to most IPOs. Learn more here
¹ Initial Public Offerings (IPOs)? | Barclays Smart Investor
² What is an IPO and how does it work? - NerdWallet UK
³ The IPO Journey - PwC UK
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