How to invest in an IPO

The first hurdle to investing in an IPO is actually finding out that one is taking place.

Back in the 1980s, when the British Government privatised industries such as telecoms and gas, it advertised the upcoming flotations on national television and on motorway billboards.

But you won’t see anything like that today!

Reading newspapers like the Financial Times or websites like The Motley Fool can alert you to new IPOs. Firms tend to float during more exciting economic times, so you may well read about an interesting new prospect in the normal business pages, too.

Not all IPOs are open to the general public. Companies increasingly offer their shares only to City funds and the like, on the grounds that it’s too expensive to allow oiks like you or me to get involved. Private investors can buy shares on the open market afterwards, it’s argued, and keeping the IPO in the City reduces the paperwork and other costs.

That’s all true, but it’s hardly in the spirit of a shareholding democracy. Surely the costs should be more manageable in the Internet era – particularly if the City got together to create a standard platform to enable retail investors to take part?

Not allowing the general public to take part in an IPO can give it the air of an Old Boy’s Network, especially if the share price soars on the first day of trading!

How to invest in an IPO with the big boys

Once you’ve discovered a potentially attractive IPO that’s open to private investors, you need to read the prospectus to find out all about the company and to evaluate its prospects.

These days you can usually download the prospectus from the company’s website. Alternatively, you might write or call the company or one of the banks taking part in the IPO, to see if they’ll post you a paper version.

Reading the prospectus is where the hard work begins. You need to study the company, its business plan and the risks of failure, as well its management and its rivals in some depth. You must also think hard about the likely flotation price you’ll pay for your shares. It may be a great business, but you need to pay a fair price to have a decent chance of making money.

Studying a new company like this is a massive topic, so please read my upcoming post on evaluating a potential IPO investment for a list of things to consider. Don’t just invest on a tip in a newspaper, whatever you do!

Hint: Take note of the closing date for applications before you begin your research. IPO open periods can be very short – sometimes only a few days!

Assuming you like the company and the prospects for its shares, you can then make your application (typically by post) and wait to see how many shares you’ll be awarded.

• If the IPO is over-subscribed, then you probably won’t receive all the shares you requested. What happens next in this case varies – sometimes only big funds making multimillion pound investments will get any shares, other times all applicants will get a reduced allocation. If this happens then hey, at least the company is in demand! An over-subscribed IPO will usually result in the company’s shares rising when they first trade on the stock market.

• Be more worried if your IPO is under-subscribed. In this case too many other investors have stayed away, perhaps because they spotted problems you missed or discounted. You’ll get all the shares you asked for, but you may wish you hadn’t. They’ll probably fall in price once trading begins, at least for a while.

IPOs are tricky investments, because the company has no record of trading as a public company, and because lots of investors are trying to estimate the company’s value without a public share price as a common touchstone.

It’s vital you do your research before you invest in an IPO, but it’s also important to realise that you don’t need to get involved at all. Many IPOs are over-priced, and so prove poor investments.

Taking part in an IPO can be exciting and sometimes lucrative, but the slow and steady approach to investing is better for most people.