Saxo Group
Buying shares in a company that's preparing to enter the public market or has recently done so is achievable with the right know-how. This guide simplifies the process of trading IPOs and shows you how to invest in a company as it debuts on the stock exchange.
IPO, short for initial public offering, is the process through which a company first sells shares to the general public. In simpler terms, it's when a company shifts from being privately owned to being publicly traded on the stock market. The IPO marks the first time shares are available to the wider public, not just private investors.
An IPO takes place before a company transitions to being publicly traded. A private company must first adhere to the rules and requirements of the stock exchange it intends to join. For instance, the Financial Conduct Authority (FCA) oversees the London Stock Exchange (LSE). Any company aiming to list on the LSE has to comply with the FCA's standards.
The specifics of how a company gets listed and meets these requirements aren't our focus here. What's crucial to understand is that any company initiating an IPO will conform to certain benchmarks regarding security, business conduct, financial health, and share structure. An underwriter, appointed by the company, typically manages this process.
The underwriter orchestrates the IPO, ensuring due diligence, preparing official documents, managing marketing, and finally issuing the shares. As a potential investor, you'll have access to a wealth of public information about the company, including its share structure, finances, projections, and initial share price. It's critical to consider these details before investing in an IPO.
You can invest in IPO stocks in two primary phases: before and after the company is listed.
Pre-listing (primary market): If you're a Saxo customer in Hong Kong, you have the opportunity to subscribe to IPOs beforehand, giving you early access to shares. Essentially, this means buying shares before they're available to the wider public. This process is limited to a select group, namely those who have subscribed to the IPO and chosen to exercise their right to buy shares. While this subscription service is currently exclusive to Hong Kong, it might expand to other regions in the future.
Post-listing (secondary market): Once the company is officially listed, its shares become available for trading like any other public company. This period signifies the end of the IPO phase as the shares are now accessible to all. For Saxo customers outside Hong Kong, this is the primary method for trading IPO stocks.
Several resources can help you track down IPOs. Online IPO calendars list upcoming IPOs across various global stock exchanges. Additionally, our news and insights hub offers updates and expert analyses on major companies about to go public.
However, remember that IPO investments come with no guarantees of success. We'll illustrate this later in the guide with an example of an IPO that didn't go as planned. The key is to stay informed about which companies are preparing to go public, do your research, and plan accordingly.
Uber's IPO in 2019 was highly anticipated. The company, known for its ride-sharing and delivery services, had become a dominant player since its inception in 2009. Available in 69 countries and holding a 65% market share, many expected Uber's IPO to be a resounding success. Initially, the company was valued at USD 120 billion, with expected public share prices ranging between USD 48 and USD 55.
However, doubts about Uber's profitability emerged as the IPO approached. Despite its revenue, profits were modest, leading underwriters to revise Uber's valuation to between USD 80 and USD 90 billion, and the anticipated share price to USD 44 to USD 50. Ultimately, Uber offered 180 million shares at USD 45 each. On its NYSE debut on 10 May 2019, shares opened at USD 42.
Though its initial share price was lower than expected, Uber's valuation was still an impressive USD 75 billion, marking it as the largest IPO of 2019 and one of NYSE's biggest. However, the excitement was short-lived as Uber's share price dropped to USD 41.57 by the end of the trading day and fell to USD 26 by June before recovering. This example underscores the unpredictable nature of IPOs – even for large, well-established companies, there's no certainty in how the market will respond.
There are two principal methods for trading IPOs at Saxo. You can either join a subscription service to buy shares in the primary market (currently only available in Hong Kong) or wait until the listing occurs and purchase shares on the secondary market.
For those in Hong Kong, subscribing to upcoming IPOs through SaxoTraderGO and SaxoInvestor is a straightforward process. Here's how it works:
The subscription service is not yet available beyond Hong Kong. Therefore, Saxo customers elsewhere can trade IPOs post-listing by following these steps:
Investing in IPO stocks involves certain fees, which vary depending on the market and your location. For instance, trading on the Hong Kong Stock Exchange incurs a fee of 0.005% of the transaction's total value. This fee might differ on other exchanges. Be prepared for a small transaction fee each time you buy or sell shares.
In addition to transaction fees, there are other potential costs:
Investing in IPOs can be rewarding, but it's important to remember there are no surefire successes. It's also crucial to consider whether IPOs align with your investment strategy. For example, if you rely heavily on technical analysis, the lack of historical price data for IPOs might be a limitation.
Here are some advantages and disadvantages to help you decide if investing in an IPO is right for you:
Investing in a company transitioning from private to public can be a potentially lucrative endeavor. However, like all forms of trading, it carries risks and there are no guarantees. The advantage of getting in early can be appealing, but it's crucial to weigh the potential downsides alongside the positives. An informed and cautious approach is key to navigating IPO investments.
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