Companies choose to make an Initial Public Offering (IPO) mainly to raise funds for future growth but sometimes it can also be to increase the awareness or stature of the company. This is often to the tune of hundreds of millions of pounds – so they have to have a solid, long-term plan in place to satisfy the requirements of the exchange they are proposing to list on (e.g. the London Stock Exchange) as well as the UKLA (UK Listing Authority). The company will also want to convince potential investors that they are a viable investment opportunity to consider.
An IPO is a process which enables a company’s shares to be subsequently bought and sold by members of the public via a trading exchange such as the London Stock Exchange (LSE). As a buyer of a newly-listed company’s stock, you’ll be among the first people to have the opportunity to invest in that company. Many investors like to participate in IPOs as the initial share price can often be good value.
But there is also an equal chance of disappointment. The flipside of all the excitement and hope is that some IPOs do not deliver in line with expectations, leaving new shareholders out of pocket. However, investing in a new equity in particular can see volatile trading (up and down) in the early days immediately after it has listed, before the prices levels out at a range that the market deems appropriate for it.
Potential equity flotations (IPOs are also described as a company “floating” on the stock exchange) prices are likely to be quoted in a range, say, between 240 and 280 pence, for example. However, the other asset IPOs are usually quoted at a fixed price (e.g. investment trusts, REITs and retail bonds), often around 100p. The company ideally wants to raise as much money as possible from the shares being issued in the IPO. Where there is a range, floating at the upper end suggests confidence in the shares among investors – the lower end suggests a little more uncertainty.