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IPO trading for beginners
Trading Strategies
Key takeaways:
- An IPO is when a private company first offers shares to public-market investors and seeks exchange trading.
- Investors may access IPO shares before listing through the primary market or after listing through the secondary market, but availability depends on eligibility, broker access and liquidity.
- IPO information may come from offer documents, company filings, market news, IPO calendars and broker insights, but public disclosure does not remove uncertainty about performance.
- Trading newly listed shares can involve costs such as broker commission, exchange fees, taxes, spreads, currency conversion and, where relevant, IPO subscription or financing charges.
- IPO trading carries risks including valuation risk, limited trading history, lock-up-related selling pressure, volatility and liquidity risk, so it should be assessed against objectives and risk tolerance.
Buying shares in a company that is preparing to list or has recently listed may be possible, but access, pricing and risk can vary significantly. This guide explains how IPO trading works, when investors may be able to access IPO shares, and what risks to consider before trading newly listed companies.
What is an IPO?
IPO, short for initial public offering, is the process through which a company first offers shares to public-market investors. In simpler terms, it's when a private company becomes publicly traded on a stock exchange. The IPO marks the point at which shares may become available to public-market investors, subject to the offer structure, jurisdiction and investor eligibility.
When does an IPO happen?
An IPO usually takes place when a private company offers shares to public-market investors and seeks admission to trading on a stock exchange. The private company must meet the listing, admission and disclosure requirements that apply to the exchange or market it intends to join. For instance, in the UK, companies seeking admission to the London Stock Exchange’s Main Market generally need admission to the FCA Official List as well as admission to trading on the LSE. The exact requirements depend on the market segment, listing category and applicable rules.
The detailed listing process is outside the scope of this guide. The key point is that companies initiating an IPO must meet listing and disclosure requirements that vary by venue, but a listing does not guarantee financial strength or future performance. An underwriter or group of underwriters typically helps manage the IPO process.
Underwriters help coordinate due diligence, offering documents, investor marketing, pricing and share allocation. As a potential investor, you may have access to public information such as its share structure, financials, risk factors and the offer price or range, where disclosed. Forecasts/projections are not always provided. These details are useful when assessing the risks and valuation of an IPO.
When can investors access IPO shares?
IPO access generally falls into two phases: before listing in the primary market and after listing in the secondary market.
Pre-listing, or primary market. This means applying for shares before they begin trading on an exchange. Allocations are typically limited and depend on the offering, jurisdiction, investor eligibility and broker or platform access.
Post-listing, or secondary market. Once the company is listed and trading begins, investors may be able to buy and sell shares through the secondary market, subject to market access and liquidity. This stage begins after the initial offering has completed and exchange trading has started. For many retail investors, this is the more accessible route, because primary-market IPO allocations can be limited.
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:
- Account access. Investors need an account with access to the relevant exchange.
- IPO information. Investors may wish to review company filings, offer documents, market news and any Saxo insights available.
- 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.
- Trading start time. Investors can check when trading on the exchange is set to begin.
- 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.