What is an IPO and how does it work?
For most traders and investors, an initial public offering (IPO) is the first opportunity to gain exposure to a company’s shares. Learn more about the IPO process and how to take a position with us.
Start trading today. Call +971 (0) 4 5592108 or email sales.ae@ig.com. Our sales team is available from 8:00am to 6:00pm (Dubai time), Monday to Friday.
Contact us: +971 (0) 4 5592108
Start trading today. Call +971 (0) 4 5592108 or email sales.ae@ig.com. Our sales team is available from 8:00am to 6:00pm (Dubai time), Monday to Friday.
Contact us: +971 (0) 4 5592108
What is an initial public offering (IPO)?
An initial public offering (IPO) is one of the methods that companies can use to go public – which will make its stock available to retail traders and investors. The company will decide how many shares it wants to offer, and an investment bank will suggest an initial price for the shares based on the predicted demand for them.
Why do companies want to go public?
Companies want to go public for different reasons, depending on their circumstances. Most are looking to raise capital to fund expansion, pay debts, attract and retain talent, or monetise assets. A company may also want to list on a stock exchange to improve its public profile.
How does the IPO process work?
The IPO process starts when a company decides that it wants to sell its shares to the public via a stock exchange. First, an audit must be conducted, which considers all aspects of a company’s financials.
If everything is in order, the business then has to prepare a registration statement to file with the appropriate exchange commission, like the Securities and Exchange Commission (SEC) in the US or the Financial Conduct Authority (FCA) in the UK.
Next, the stock exchange that the company wants to list on will review the application, after which it’s either accepted – sometimes subject to certain amendments – or rejected. If it’s approved, the company will enlist the help of an underwriter to help them decide how many shares it wants to issue and at which price.
The underwriter is usually a bank, and it’s their job to start a book building process, looking for investors to subscribe to (register their interest in) the IPO. Any interested parties will receive a prospectus of information about the shares, where they’ll be listed and the potential opening price.
The IPO will be the first chance for non-private investors to buy the company’s shares in what is known as the primary market – a transaction between the original holder (the company) and an investor.
Who sets the IPO price?
Investment banks set the IPO price. The company decides how many of its shares it wants to sell to the public and then the nominated investment bank does a valuation of the business. Once that’s done, an initial share price is released, and the public can start trading shares when the listing happens.
Pros and cons of IPOs
Pros of IPOs
A successful IPO can raise huge amounts of capital, as becoming listed on a stock exchange can help to increase the exposure and public image of a company. In turn, the firm’s sales and profit can increase. IPOs are also beneficial to traders because it’s easier to buy publicly traded shares than those that only trade privately.
Cons of IPOs
Public companies are subjected to the rules and regulations of a governing body. One of the rules is that the company is required to publicly disclose financials, such as accounting information, tax and profits. IPOs also carry significant costs and could require the company to raise additional funding if its shares perform poorly.
How to trade or invest in an IPO
Once an IPO is complete, you can start trading or investing in shares on the secondary market. With us, you’ll be able to:
- Go long or short on share prices with CFDs
- Buy and own shares with stock trading
Remember, if you’re trading, you can profit from upward or downward share price movements. But if you’re investing in shares, you can only profit from rising share prices and dividend payments – if the company makes them.
Find out more about trading IPOs with our guide to taking a position after a listing
How do companies perform after their IPO?
The tables below show how companies’ share prices performed after the first day, first week, and first month of their IPOs.
- Performance - first day
- Performance - first week
- Performance - first month
| 2017 | 2018 | 2019 | 2020 | 2017-2020 | |
| All IPOs | 8.6% | 8.7% | 8.5% | 6.6% | 8.3% |
| Main market | 6.3% | 5.7% | 7.4% | 4.6% | 6.1% |
| AIM | 11.2% | 12.1% | 10.7% | 9.0% | 11.2% |
| 2017 | 2018 | 2019 | 2020 | 2017-2020 | |
| All IPOs | 9.3% | 10.3% | 11.0% | 9.0% | 9.8% |
| Main market | 5.6% | 4.8% | 9.4% | 4.4% | 5.9% |
| AIM | 13.6% | 16.5% | 14.3% | 14.6% | 14.7% |
| 2017 | 2018 | 2019 | 2020 | 2017-2020 | |
| All IPOs | 8.0% | 9.5% | 13.9% | 1.5% | 8.4% |
| Main market | 5.3% | 2.8% | 13.7% | -0.7% | 5.2% |
| AIM | 11.0% | 17.3% | 14.2% | 4.2% | 12.4% |
FAQs
How long is the IPO process?
The length of the IPO process can vary, depending on how well it’s being managed and coordinated. The financial audit stage – which is the first stage of a company going public – can be the longest, especially if the company’s books are not in order.
To combat the time commitment of a traditional IPO, more and more companies are turning to alternative methods of going public, like SPACs – which can be considerably faster.
How much does an IPO cost?
The cost of an IPO for a company will depend on the registration requirements of the stock exchange where it’s being listed. In addition, there will generally be underwriting fees and offering costs, as well as legal and accounting fees. Larger companies could face additional costs when preparing to list.
How is the IPO price calculated?
The IPO price is calculated by an investment bank. First, the company decides how many of its shares it wants to sell to the public. Then, the nominated investment bank does a thorough valuation of the business. Once that’s done, an initial share price is released, and the public can start trading shares when the listing happens.
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