I am sure we are all familiar with the concept of trading, or buying and selling, stocks and shares but have you ever wondered where those shares came from, how do new companies join the stock market and issue shares? And whether you could you participate?
There are various ways in which a company can issue shares to join or list on a stock exchange
The method that a company chooses may well determine whether you can get involved in that process, as a retail investor/trader.
How do you invest in new issues, placings and IPOs?
Once you have established if the risks of IPOs, placings and new issues are for you. Your next question is probably "how can a retail investor/trader invest in them?"
Firstly, you will need to have the right stockbroker one that allows its clients to participate in the new issue’s markets in the widest sense
To that end, you will need to have a conversation with your stockbroker about this.
You will need to discover if they offer these services and if they do, are there any restrictions in terms of suitability that you need to meet? Such as client classification or net worth.
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.
Where can you invest in IPOs, New Issues & Placings
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What's the difference between a new issue, placing and IPO?
This a good question and a very good place to start our guide or watch our video discussion with PrimaryBid about whether or not private clients should have institutional access to new issues.
What is an IPO (Initial Public Offering)?
The IPO or Initial Public Offering is among the methods through which companies can list on a stock exchange. Under an IPO an existing, but privately held company offers shares in the business, to investors, usually to both institutions and retail investors.
Typically, the company issues new shares in its IPO and this process is underwritten by banks and brokers who for a fee guarantee to get the issue of new shares away at a minimum price
As part of this process, the underwriting banks and brokers will usually roadshow the business looking to IPO, to their institutional clients and sound out their appetite for investment in the new issue.
Working with the business and its advisors the underwriting banks decide on key items such as the valuation, the number of and type of new shares to be issued etc. They prepare formal offer documents and they may also advise the company on issues such as the timing of the IPO and which jurisdiction or stock exchange it should take place in. In recent years stock exchanges have competed aggressively with each other to attract the largest IPOs.
Once these key factors have been decided then an IPO filing is made and offering documents are published. It’s at this stage that investors, both retail and institutional, can apply for the new shares in the company. The IPO price can vary subject to demand, though the underwriting and issuing banks will usually have indicated a price range, within which, the new issue will likely come to the market. 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.
That said the underwriters often like IPOs to go with a” bang or a pop” meaning that demand for the new shares is such, that there is a significant aftermarket demand, or to put that simply, that investors who were scaled back or who may not have been allocated any shares in the IPO buy those shares in the secondary market, once they are quoted on the stock exchange. It’s not uncommon for shares of companies that have just IPO’ed to trade well above the IPO price in the after or secondary market in these circumstances.
What are New Issues?
IPO’s are a form of new issue 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.
What are stock Placings?
Placings are another way in which companies which are not currently listed can gain access to stock markets and the investors on 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 be 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.
Are new issues, IPOs and placings right for retail investors?
They are certainly not for everyone There are no guarantees that the listing price of new issues, however they are bought 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 which 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.
What sort of returns can you expect from investing in new issues, placings and IPOs?
This a very difficult question to answer definitively because the results 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 out in an article in May 2019 (written in the wake the disappointing IPO of ride-sharing app UBER) the price of Facebook moved very little in its early trading after it IPO’ed 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 IPO’s 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
What are the risks of IPOs, New Issues & Placings?
As we noted above stagging or investing solely in new issues is a speculative business that is often driven by sentiment. There are no guarantees that listing prices will be higher than the valuation at which the new issue is priced. So, there is a genuine risk of loss.
Judging whether a new issue is competitively priced and why the present owners of the business are selling is definitely a skill, getting that judgement wrong can be expensive.
Information about why a company is having a secondary placing may be limited and traders and investors may need to make decisions quickly, rather than deliberating at leisure.
What are the main benefits ofIPOs, New Issues & Placings?
New issues are a regular stream of potential new investment opportunities, the investor’s money can be turned around quickly in the right circumstances, moving from issue to issue rather than being tied up in long term buy and hold strategies.
If you are building an investment portfolio, however, new issues can be a great way to get into an exciting business on the ground floor, at least as far as the stock market is concerned.
When can you sell out after a new issue, IPO or placing?
That rather 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.
Where can you find out what companies are issuing an IPO, new issue or placing?
One way to keep tags on what new issues are coming is to track a calendar of upcoming issues such as this one from the London Stock Exchange. Reading the specialist financial press is also a good idea but the best method of gathering intelligence is to keep closely in touch with your stockbroker who should be well informed about what new issues are in the pipeline.