Stockbrokers
Initial Public Offerings
A guide from Barclays Stockbrokers
Introduction
This quick guide is designed to give you useful information about
Initial Public Offerings (IPOs). It will cover key areas such as:
• What is an IPO?
• What happens in an IPO?
• Why companies decide to float
• Volatility
• Investing in IPOs
• How to invest in an IPO
Before you read on, it’s important to note that investing in IPOs carries a significant degree of risk.
The value of your investment may fall significantly after the newly issued shares become available on the market.
In 2016, 69 companies
joined the UK stock
market through Initial
Public Offerings; raising
over £3.5 billion.
2014 remains the biggest
of recent years with
137 IPOs raising over
£14.5 billion.
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What is an IPO?
IPO stands for Initial Public Offering. As the name suggests, it often marks a private
company’s first offer to sell its shares to the public. Or it can be your first chance to get
shares in a company returning to the market after an absence.
When companies issue an IPO, which is sometimes called
a ‘flotation’ or ‘new issue’, they become a publically listed
company on a recognised stock exchange, e.g. the London
Stock Exchange (LSE).
IPOs allow investors to buy shares in a company before they
become available on the stock exchange. It’s important to
bear in mind that the value of your investment may fall
significantly after the newly issued shares become available
on the market. If you are considering investing in an IPO, you
must weigh up the potential risks and rewards carefully.
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Any funds raised by an
IPO go directly to the
company. Funds raised
by later stock exchange
transactions pass from
buyer to seller.
What happens in an IPO?
The company announces their intention to float (ITF)
Applications
Even before any official announcement is made, there
Investors can apply to buy shares via a stockbroker or
tends to be a lot of press commentary around companies
wealth manager who is approved by the company to take
who could be about to issue an IPO or ‘float’ on the stock
part in the IPO – this information is usually confirmed in the
market.
prospectus or company website. Applications are typically
placed online or by phone. Each IPO has a minimum
The initial announcement comes from an ITF notice to a
investment (usually £1,000 to £2,000) and a set offer
recognised stock exchange such as the LSE. The ITF
period (typically a minimum of 6 days and maximum of 2
announcement typically includes the company’s investment
weeks). All investors will be asked to confirm they have read
highlights and details of who can invest, i.e. institutions,
and understood the information contained in the
professional investors and / or private retail investors.
prospectus before investing, particularly the key risks
highlighted by the company.
Investors can’t place orders in the IPO at this stage – they
can only start investing when the company issues their
Shares allocated and priced
prospectus, pricing notification and any supplementary
Once an IPO closes, the company will confirm the investor’s
documents. You should read these documents carefully to
allocation of shares and confirm the company’s launch in
ensure you fully understand the risks and base any decision
the market. The price of the stock will be decided too,
on the information contained in them.
usually within 48 hours of the offer closing. If an offer is
oversubscribed, investors may receive less than they
Investors note interest
requested. This depends on supply and demand and will
Stockbrokers and wealth managers who are taking part in
often be set out in the company’s allocation policy. Barclays
the IPO usually give their clients a chance to note their
have their own allocation policy, which we use when there
interest in the ITF period. This allows them to stay informed
is no set policy provided by the issuing company.
about the offer timings and be among the first to find out
when the IPO offer officially launches.
Secondary trading
Once the IPO is closed, the company starts trading on the
The offer period
stock exchange. It will trade like an ordinary share with a
When the IPO is launched, the company will publish their
buy / sell price being made available. Depending on supply
approved prospectus, often along with a pricing notification
and demand, this can be more or less than the price paid in
for the offer and any other supplementary documents.
the IPO and is generally influenced by a number of factors.
This will include confirmation of the defined ‘offer period’.
These include company performance, company perception
Throughout this time investors can apply to invest in
following the IPO as well as general market conditions.
the company, before it officially launches on the stock
exchange. The company will usually not have a defined
There is usually a period of ‘conditional dealing’ which
price at this stage, but the pricing notification will give a
normally lasts for three days and is linked to the IPO deal
guide range of the stock’s expected price. It’s worth noting
settling on the stock market. At this time, some elements
that price is never guaranteed and could be higher or lower
of dealing are not available on the stock, e.g. you can’t
than shown on any supplied documents. Also, if demand
purchase within an ISA, as the stock has not officially
for the offer is high, the offer period can close early.
settled and obtained a full listing on the stock exchange –
this is only achieved on the official settlement date.
The stock price can be volatile on the first few days of
secondary trading.
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Why do companies decide to float?
IPOs tend to fall into one of two categories: smaller companies looking to raise capital to
expand, or larger companies looking to increase their investor base, make acquisitions,
restructure their finances and/or raise capital.
For company founders and their backers, an IPO is a great
Ideally the company wants the price of their newly issued
opportunity to turn equity into cash. So if you’re thinking
shares to rise when they become available on the open
of investing in a company that’s about to go public, you
market. This improves the value of their equity and
should consider whether the company will retain the
encourages positive market sentiment towards the new
necessary talent and backing it needs to sustain its
shares. So they have every incentive to get the pricing right,
growth.
though there is no guarantee that this will happen.
How newly issued shares are priced
Potential risks and rewards
Before issuing an IPO, the company will typically find an
IPOs can be exciting for everyone involved but, as with any
underwriter (usually an investment bank or consortium)
investment, you should assess the potential risks and
that will find buyers for the shares that are to be floated
rewards thoroughly. Aside from reading the prospectus of
and buy any that are unsold once the IPO closes.
the company involved, you should ask yourself the
following questions:
The company and underwriter set an offer price for the
• Why is the company going public?
shares, aiming to balance achieving the highest possible
• How will it use the capital it raises?
price with generating the maximum level of interest. This
• How strong is the competition in its area of business?
can sometimes lead to what is referred to as ‘initial
• Has the management got a successful track record, and
underpricing’ or ‘lowballing’.
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will it stick around after the flotation?
Volatility works both ways
IPOs can experience high volatility once they become available on the open market.
In fact, in 2013, one IPO rose by around 40% on the first day
These two examples show how volatile new issues can be,
of trading. As of September 2016, performance is still strong
but you still have to bear in mind that the past performance
with the shares worth 58% more than they were at issue.
of these investments, like any other, is not a reliable
indicator of their future performance. You need to consider
In the case of this particular IPO, the price range at issue
the potential of each based on the information in its
proved very attractive to investors, which meant there was a
prospectus.
significant ‘scaleback’ on applications. This increased the
demand for shares in the secondary market – driving the
price higher and higher.
Of course, volatility works both ways. In 2015, another IPO
fell 4% on its first day of trading before going on to lose
63% over the next year.
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Investing in IPOs
As with all types of investments, it’s important to be clear on your objectives before making
a decision. IPOs are generally more suitable for those looking to achieve growth, income or
both over the long term. Unless you are a very experienced investor, a short-term approach
is not considered appropriate. As demonstrated by the fortunes of recent IPOs, you can lose
heavily.
A ‘buy and hold’ investment
since you may be able to buy the shares for less once the
If you intend to buy and hold IPO shares, your decision
euphoria fades.
should be based on the fundamentals of the business,
Investing in IPOs with Barclays
whether it seems cheap or expensive at the offer price and
We hope you’ve found the information in this guide useful
whether the plans of the company match your investment
and informative. If you are considering investing in an IPO,
objective, i.e. are you hoping to achieve income, growth or
you can find information on current and potential IPOs on
a blend of both? Avoid being influenced by how popular the
our website.
IPO is and what you think the price might do immediately
after listing.
Once an official announcement is on our website about an
IPO, you can note interest through Barclays. We will then
keep you up to date with any important information about
the offer and pricing.
Keep an eye on price
Ready to invest? See page 8 to find out how to invest
Although existing shareholders will usually aim to get a
online or by phone
good price for their shares, this doesn’t mean that an IPO
is necessarily overpriced. In fact, many deals will be priced
slightly below the estimated fair value of the company to
ensure that the shares hold up well once they begin trading
in the open market. However, in certain sectors such as
technology there is some evidence that stocks tend to be
priced too expensively at first, making them more likely to
fall in the first few months. An IPO that seems interesting
but expensive early on may be worth keeping an eye on,
When stock markets are
weak, IPOs are rare. The
lack of investor appetite
means the company is
unlikely to achieve the
best possible price for
its newly issued shares.
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How to invest in an IPO
When the offer period begins, the company will issue a prospectus, pricing statement and
other supplementary documents. You should read these key documents carefully to ensure
you fully understand the risks before making an investment decision.
It’s important to note before you start that investing in IPOs carries a significant degree of
risk. The value of your investment may fall significantly after the new issue becomes
available on the market.
You can place your investment online or by calling Barclays Stockbrokers on 0800 376 6000*
or 0333 202 7545* when an IPO offer is open. Or you can visit the IPO page on our website,
BarclaysStockbrokers.co.uk/IPO
The minimum investment amount will be detailed in the company prospectus but will typically start from £1,000.
Please make sure you have read the prospectus and other key documents carefully before making a decision.
You can invest through Barclays with any of the following accounts:
• Investment ISA
• MarketMaster®
• SIPP
• Pension Trader Account
• Company Dealing Account
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Glossary
Intention to float – official announcement by the company of their intention to become publicly listed.
Application – your instruction to us to take part in the offer on your behalf.
Scaleback – when a new issue is oversubscribed, scale back refers to the procedure whereby applicants receive
a proportion of the number of shares for which they applied.
Allocation – the final number of shares allocated to you following any scaleback.
Stop-loss – an order to sell shares when the share price falls to or below a specified stop price. Used to cap the amount
you are prepared to lose on a holding.
Pop – a stock is said to have ‘popped’ when it suddenly trades higher after being made available to the public on the
stock exchange.
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Item Ref: IBIM3007 February 2017