Every year, there’s a vast amount of interest in Initial Public Offerings in which private companies decide to go public by selling a certain amount of its stock on the open market. Some IPOs are much bigger than others depending on the market value the company obtains in its placing – and of course, the perceived brand value (the bigger the name, the more attention the IPO gets). Over the years some IPOs have been covered extensively in the media and seen huge interest from early investors as was the case with household names such as Facebook, Twitter, Man Utd and Royal Mail.
Very soon you’ll undoubtedly start to hear about the next mass media covered IPO – Aston Martin. The automotive brand famous for Bond movies recently announced plans to list its shares on the stock exchange later this year.
But before you jump at the chance to own a piece of James Bond luxury, there are both positives and dangers of trading an IPO.
3 Positives of trading into an Initial Public Offering
- Discounted offering – when IPOs launch, shares are typically offered at a a discount to attract buyers. So if you are able to pick up shares as part of the initial offering, you are likely to take advantage of a potential discount
- Potential for positive volatility – depending on the success of an IPO, there is typically lots of volatility within the first few days of its launch on the stock market. If there is huge demand for the shares, there is the potential for positive volatility where prices could rise as much as 40% within the first few days. For example, Royal Mail shares rose 38% on its first day with prices almost doubling in value within a few weeks
- You can short IPOs – when trading with XTB, you don’t have to just buy an IPO and hope that prices will rise. You can also short sell them, meaning you can take advantage of falling prices, giving you greater flexibility. So if you think an IPO will underperform, you can short sell its prices with XTB as a CFD (compare brokers for CFD trading here).
3 Dangers of trading an Initial Public Offering
- Expect volatility – as mentioned above, most IPOs suffer from volatility in the first hours and days of its launch. This can make trading them extremely hard to predict, especially when done so using leverage. On the one extreme you have the Royal Mail example. On the other you have Facebook, which launched at $38, rose to a high of $45 within hours only to fall back to $38 by market close on its first day. Within a few months, shares were trading as low as $20.
- Form can be temporary – how an IPO trades on its initial days as a publicly traded company is no guarantee of how it can trade in the subsequent months or years. So for some investors it may be wise to wait until the volatility has calmed before getting involved in trading an IPO
- Beware first earning season – when private companies goes public, it means they are now required to update shareholders on their earnings every quarter, as opposed to once a year. This can add even more volatility to the stock as initial investors react to whether the firm is living up to the claims made in its prospectus.
Trading IPOs with XTB
XTB, one of the worlds largest FX & CFD brokers, offers you the ability to trade IPOs as a CFD. You can go long or short on the share prices of companies as soon as they debut on the world’s stock markets and add important risk management features such as a stop loss to protect any downside risk from additional volatility. Learn more about trading FX and CFDs with XTB here.