IPO trading for beginners

Where can investors find IPO information?

Several resources can help investors monitor upcoming IPOs. Online IPO calendars may list upcoming IPOs across various global stock exchanges. Market news, company filings and broker research may also provide information about companies preparing to go public. 

However, IPO investing comes with no guarantee of positive returns. The Uber example below shows how market reception can differ from expectations. Investors should review the offer documents, valuation, business model, risk factors, lock-up arrangements and market conditions before considering a newly listed stock.

IPO listing example: Uber 

Uber's IPO in 2019 shows why investor expectations around high-profile listings can change before and after trading begins. The company was well known for ride-hailing and delivery services, but questions around profitability and market conditions affected pricing expectations before the listing.

Uber priced its IPO at USD 45 per share, near the bottom of its USD 44 to USD 50 target range, and its shares opened at USD 42 on their first trading day.

However, the initial trading price was below the IPO price, showing that a well-known company can still face weaker-than-expected demand once trading begins. The shares also closed below the IPO price on the first trading day. This example shows that IPO outcomes can be uncertain, even for large and widely recognised companies.

How IPO investing works at Saxo

If participation in the primary market is not supported, clients may still gain exposure to an IPO by trading the shares in the secondary market, which is when the company’s shares begin trading on an exchange for the first time. Saxo typically makes the instrument available after the previous market close and before the first day of trading. Not all IPOs are added, but larger offerings are generally made available where client demand is expected.

Trading newly listed shares on the secondary market

Saxo clients can trade newly listed shares on the secondary market by following these steps:

1. Account access. Investors need an account with access to the relevant exchange.
2. IPO information. Investors may wish to review company filings, offer documents, market news and any Saxo insights available.
3. Opening auction. On the first day of trading, the start of trading may be delayed while the exchange carries out the opening auction. During this process, buy and sell orders are collected to help determine an opening price that reflects market demand and supports orderly trading.
4. Trading start time. Investors can check when trading on the exchange is set to begin.
5. Order placement. Once the shares are available to trade, investors can review factors such as price, liquidity, order type, costs and risk before placing an order.

What costs can apply when trading IPO shares?

Trading IPO shares or newly listed shares can involve costs that vary by market, exchange, broker, account type and country of residence. For instance, trading Hong Kong-listed shares can involve exchange fees, levies, stamp duty and broker charges. Fees vary by venue, broker, account type and country of residence. Other exchanges may apply different fees or taxes. Investors should check the full cost before placing an order, including commission, exchange fees, taxes, spreads and any currency conversion costs.

In addition to transaction fees, there are other potential costs: 

• Broker commission. A fee charged by the broker for facilitating the trade. 
• IPO subscription fee. A charge that may apply where primary-market IPO subscription is available. 
• Other fees. Additional charges might apply, such as financing costs if leverage is used. Leverage can amplify losses as well as gains and may not be appropriate for all investors. 

Are IPOs appropriate for your objectives and risk tolerance?

Investing in IPOs can produce gains or losses, and there are no guaranteed outcomes. Investors usually consider whether IPOs align with their investment strategy, time horizon and tolerance for volatility. For example, newly listed shares have limited trading history, which may be a limitation for strategies that rely on historical price data.

Here are some common potential advantages and disadvantages to consider:

Potential reasons investors consider IPOs

• Early exposure. IPO investing may provide early exposure to a newly listed company, but the offer price may still be too high and the share price can fall after listing.
• Company information. Companies going public usually publish offer documents and financial information, which can help investors review the business, risks and valuation.
• Public disclosures. IPO documents can provide information about the company’s financials, ownership structure, risk factors and use of proceeds, although disclosures do not remove uncertainty about future performance.

Risks and limitations of IPOs

• Valuation and sentiment risk. IPOs can generate significant market attention, but post-listing performance may fall short of expectations, as seen in the Uber example.
• Limited trading history. IPO investors often have less public trading history to analyse, and market reception after listing can be unpredictable.
• Lock-up and selling pressure. IPOs may include lock-up periods that restrict some existing shareholders from selling immediately. When these restrictions expire, selling pressure can affect the share price.
• Volatility and liquidity risk. newly listed shares can be volatile, and liquidity may be uneven, especially in the first days or weeks of trading.

Trading IPO shares online

Investing in a company transitioning from private to public can offer exposure to a newly listed business, but outcomes are uncertain. Like all forms of trading and investing, IPO trading carries risk, and there are no guaranteed returns. Early exposure may be appealing, but you should consider valuation risk, limited trading history, volatility, liquidity and costs. IPO analysis usually involves reviewing the offer documents, valuation, risk factors, costs and whether the investment fits your objectives and risk tolerance.