What are IPOs and placings, and how can you invest?

Buying shares just before they hit the stock market is usually the first opportunity for private investors to buy into a company.

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  1. Marcus Tree

Initial Public Offerings (IPOs) are a common way for companies to list on a stock exchange. Also known as a ‘stock market flotation’, they are usually the first opportunity for investors to buy into a company’s shares. In the UK, the main markets are the Official List of the London Stock Exchange, also sometimes referred to as the Main Market or a ‘full listing’; and the Alternative Investment Market (AIM), which is a ‘junior’ market for smaller, often higher risk companies.

As a company moves from private to public ownership via an IPO, any money raised can be used to grow the business, reduce debts or realise returns to the owners. Alternatively, they may simply be seeking to grow and diversify their investor base.

How do IPOs work?

First, a company announces its intention to float and will prepare and release a ‘Prospectus’, a document describing the offer and the business in detail, or in the case of companies floating on AIM, an ‘AIM Admission Document’. A decision to buy shares during an IPO or new issue should always be based on the information contained in this, along with any supplementary documentation. The Directors must give a full and fair description of the business including the risks. A ‘range’ within which the shares will be priced is also often announced, with the precise price usually dictated by demand for the offer.

The IPO will then open for an ‘Offer Period’, during which applications can be submitted. Once this closes, the final price is announced and investors are allocated shares based on the amount they applied for. If the issue is oversubscribed there will be a ‘scaling back’, in which case investors won't necessarily receive all the shares they've applied for and any excess monies will be returned.

Shares are then admitted to the stock market – also known as the ‘secondary market’ – and can be bought or sold during normal market hours at the prevailing market price, just like those of any other listed company. Initially, though, there may be a period of ‘conditional’ dealing with any trades during this time conditional on the company being listed on the Exchange without any hiccups. This can mean extra risk, as should the company fail to be listed all transactions during the period would be voided. As such there are some limitations, for instance buying within an ISA or SIPP, until ‘unconditional dealing' begins.

Investing in IPOs, and individual companies generally, can be higher risk as the fortunes of your investment rest on a single business. In addition, a company which is the subject of an IPO may not have a long track record and a fair price could be difficult to calculate. In many cases you also won’t know the exact price of the shares in the offer until after you have committed to the application. Investors should make sure they understand the company and the specific risks, and make sure their holding is part of a diversified portfolio.

Placings

In contrast to an IPO, a placing is an issue of shares to a specific group of investors, usually institutions. They’re a way for publicly listed companies to raise further money by issuing more shares.

Unlike a ‘rights issue’ that is available to all existing shareholders, a placing of shares is made to a range of suitable buyers who can be found. However, if a company wants to raise a lot of capital it will usually be required to have a rights issue to prevent existing holders having their shareholding ‘diluted’ against their will. However, placings can still be unfair to existing shareholders if they are excluded and new investors can buy shares at a discount to the market price.

About Primary Bid

Historically, only institutional investors have been able to participate in many IPOs and placings. However, increasingly they are becoming available, especially thanks to Primary Bid. This is a platform that connects publicly listed companies raising capital with individual investors. We believe it provides a crucial mechanism for individuals to join IPOs and placings on equal terms as institutional investors, thus democratising an important aspect of markets; and it could be a convenient means of investing in an IPO and adding the shares to your Charles Stanley Account.

Primary Bid does not charge individual investors any commission for using the platform. Instead, it charges companies a fee based on the money they successfully raise. You also don’t pay any commission to Charles Stanley and you don’t pay stamp duty – an advantage of buying shares when companies are floating. There’s more information on the Primary Bid website, but please note that not all IPOs and placings are available through Primary Bid.

You can apply for an IPO or placing through Primary Bid, supplying the details of your Charles Stanley Direct Investment Account into which Primary Bid will transfer the shares, once secured, free of charge. We would ordinarily expect to receive the shares some time on the Admission to Trading Date, which is when shares begin unconditional dealing for the first time. Please note Primary Bid can only transfer shares to an Investment account, not an ISA, Junior ISA or SIPP.

It may also be possible to participate in an IPO directly with Charles Stanley Direct. A small number of IPOs that are not available through Primary Bid may be available to retail investors through our New Issues Desk. Please do get in touch with us to check if Primary Bid is not offering an IPO you are interested in. We are not, however, able to offer access to any placings.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment, please seek professional advice. The information contained in this article is based on our understanding of current UK tax provisions, which is subject to change, and the benefits of which would depend on your personal circumstances.

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