Investing in IPOs enables investors to be the first to own publicly traded shares in a company before they are admitted for general trading.
The process of floating on a stock exchange involves an initial round of funding where investors can secure shares at a specific price before they start trading, this is the IPO price.
Depending on the demand for the shares, IPOs can sometimes be oversubscribed due to high demand which can be a good indication of potential performance of the shares in the early days of trading.
This situation is of course highly desirable for investors and can provide significant returns in a short period of time as well as giving long term investors a head start on those that buy after the IPO.
Snap, the owner of social app Snapchat, is good example of this having had an IPO price of $17, investors could have sold as high is $29.40 in the following days.
Of course, not all IPOs provide gains initially and some can fall heavily if the market feels the IPO price was too high and overvalued the company.
How to invest in IPOs
When IPOs are announced intermediaries are appointed to undertake certain roles such as promoting the IPO, underwriting the issue and acting as a broker.
The larger the IPO the more intermediaries are involved and the higher the chance of private investors being able to get in on the action.
However, private investors who only use larger share dealing platforms may miss the opportunity to invest in some IPOs as their platform does not provide access to them.
Indeed, some smaller IPOs are exclusive to only a select number of brokers and if you do not have an account with them you will not easily be able to partake in the IPO.
Some specialist brokers and intermediaries will also be able to provide access to other types of capital raisings such as placings.
A placing is where a company who has already listed returns to the market for further cash. Just like IPOs, the cash from placings can be employed in a range of uses including improving the balance sheet, acquisitions or funding specific growth projects.
However, placings are fundamentally different to IPOs because the company is already trading and knowledge of the placing is not public information. This is because in many cases shares are offered at a discount to attract interest and quickly fill the issue and could impact the share price in the short-term