How To Invest In IPOs & Upcoming New Issues

Stock placings are another way in which companies that are not currently listed can gain access to stock markets and the investors in them.

Placings are often used by companies who do not necessarily need to raise money, or if they do, they wish to have only a select number of new institutional shareholders.

Placings are typically organised by the company’s brokers/bankers, who approach institutional investors and invite them to participate in the placing, setting out the terms of the proposed issue and the nature of the business that they will be investing in. In this type of issue, there is usually little or no opportunity for retail investors to participate.

That said, the placing is proving popular among listed smaller companies looking to raise additional capital.

Often, the company will issue new shares at a discount to the current share price.
Depending on the size of the issue and the demand for the shares, these placings may take place through just one or two brokers, though in larger issues, there may be a bigger underwriting group.

In theory, there should be an opportunity for retail investors to participate in these secondary placings, though they are often conducted on a first-come-first-served basis. So, whether you hear about them before they’re completed may depend on your broker and their connections.

Retail investors can invest in IPOs, but, they are certainly not for everyone There are no guarantees that the listing price of new issues, however they are brought to market, will be higher than the issuing price.

If the share price of the new issue in the secondary market falls below the issued price, then you will have a running loss on your investment. You then have a decision to make as to whether you should sell the shares and take that loss, or hold on in the hopes that the price will recover above the issue price in future.

New issues are by nature speculative; investors are putting money into businesses that may have little or no track record, valuations for which are often driven by sentiment and can prove to be fragile, if, for example, the recently floated company experiences a downturn in its markets, loses a large order or suffers some other form of disappointment.

New issues are a form of IPO but more often than not these days, the term IPO refers to the floatation of a large ongoing concern such as a tech unicorn or state-owned business etc.

When smaller companies come to list or float on the stock exchange, they are referred to as being a new issue. This is particularly true of the UK, the phrase IPO being an Americanism.

The term new issue can also be used to describe an issuance of shares or debt/bonds from an existing and listed business; for example, a company whose ordinary shares are listed on the stock exchange may make a new issue of convertible bonds to raise additional working capital for a project or expansion.

But whether the new issue is from a business listing for the first time or an issue of new paper from a company that’s already listed, the process is very similar to that of the IPO, but on a smaller scale. The issue will typically be underwritten; permission to list the new securities is sought from the exchange and offer documents are prepared. The underwriters and their associates will gauge demand and applications for the new shares or bonds are invited from investors and the new issue is listed on the exchange.

Investment returns will depend on many variables, such as the issues you apply for and participated in, your approach to trading the issues, that is whether you sell the new issue on the first day of trading regardless, or whether you tuck them away for a few weeks, months or even longer.

As the FT pointed in May 2019 (written in the wake of the disappointing IPO of ride-sharing app Uber NYSE:UBER ), the price of Facebook (NASDAQ:META) moved very little in its early trading after it IPO’d back in 2012, but its share price has risen multiple times in value over the last seven years.

A long-term study of US IPOs, using data from 1980 through to 2016, conducted by Professor Jay Ritter of the University of Florida, found that the average return from among more than 8,500 US IPOs was +17.90%, based on their first day of trading, and some +21.90% over a three-year holding period.

Those returns, of course, are based on the idea that an investor participated in each one of the new issues and using averages can, of course, mask a wide range of underlying individual outcomes.

The London Stock Exchange keeps a list of upcoming new issues here.

The number one reason is to raise new equity to expand the business. The other reason is to raise money and repay some of the debt raised earlier. Early investors in the company may also wish to sell their shares to the public to exit the investment.

In an IPO prospectus, it will list all the important information related to the IPO, such as:

• Valuation of the company
• Number of new shares to be issued
• Exchange to be listed
• Indicative price range
• Offer period
• Timing of the IPO, among others

A global tech company usually considers a US listing first because investors there are more receptive to these type of companies. A mining company, on the other hand, may look to the UK.

In recent years, stock exchanges have competed aggressively with each other to attract the largest IPOs. To date, the largest IPO in history is Saudi Aramco floatation in 2019 at $29.4 billion, followed by Alibaba (BABA) listing in 2014 at US$25 billion.

Stockbrokers can provide access to IPOs or you can invest through PrimaryBid and normally have some allocation for retail investors. If you’re interested in IPOs, ask your stockbroker to add you to their list of contacts. Hargreaves Lansdown has this IPO alert where you can sign up.

Depending on the popularity of the IPO, you may not get all the shares you wanted to buy. During a roaring tech bull market, for instance, most tech IPOs were hoovered up by institutional investors.

Another point worth noting is that not all IPOs are available to retail investors.

No, it is quite common for private investors to get less than they applied for if an IPO is oversubscribed.

Once the key points of the IPO have been nailed down, investors will weigh how much shares to buy and what its allocation is.

In popular IPOs, investors tend to apply for more stock than they actually want in expectation of their allocation being scaled back in the final issue; the more demand there is for the new shares then the higher the IPO price is likely to be.

Firstly, you will need to have a stockbroker that allows its clients to participate in the new issue’s markets in the widest sense.

If your broker does offer new issues and you meet the criteria, you will also need to have liquidity at hand. When you apply for new issues, you typically apply for a fixed number of shares at a set price (the issue price) and you will need to have the funds available, on-demand, to pay for those newly issued shares.

It’s worth bearing in mind that new issues crop up regularly and that if all your money is tied up in one issue, you run the risk of missing out on others. That may be ok if you are cherry-picking, but Stags, as those who trade in new issues are known, often try to participate in as many new issues as possible to try and spread their risk and diversify their returns.

This depends on the individual issue, though there will normally be a minimum holding period.

The purpose of the new issue is usually to raise fresh cash and create new shareholders for a company. The underwriters and other advisors to a new issue don’t like to see the new money they have raised, and the new shareholders they have created immediately heading for the exit.

There may also be some practical issues that can delay the ability to sell a new issue. For example, you may need to be in possession of the newly issued shares before you can sell them. It’s best to check what these restrictions are before you invest in a new issue, on a case by case basis.

For larger IPOs, CFD and spread betting brokers will often make prices in the IPO, which means that there is potential to put on a hedge if you can’t immediately sell your new shares.

A stock market floatation is when shares are first admitted to be publically traded rather than privately held.

The phrase floatation comes from the term “free float” of shares, which refers to the amount of shares that are available for the public to buy and sell.

A good example of a company with a low float is VinFast the EV car maker from Vietnam. We reported in our analysis that one of the reasons the VinFast share price crashed after they IPOd was because when they floated the company shares there were very few shares available for the public to trade.