How to invest in an Initial Public Offering (IPO)

IPO, short for Initial Public Offering, is when a private company makes their stock public for the first time. With the goal of raising equity capital, they offer or ‘float’ as many shares as they’d like to the public, allowing investors to tap into them. An IPO is an opportunity for investors to own shares in a business, and they can do what they want with their share - hold on to it, sell it, or even buy more on the stock market.

IPOs are typically undertaken by small businesses looking to expand or by large privately-owned companies who want to become publicly traded. No matter their size, the company usually nominates a corporate adviser, investment bank or stockbroker to manage the process of listing the company, as well as setting the price of the IPO.

When a company wants to go public, it has to determine how much it’ll need to raise at the IPO, the securities it will offer, and its initial listing price. Once all these factors have been determined, the company can lodge a prospectus (containing important information for investors) with the Australian Securities and Investment Commission (ASIC). Once they get the green light on approval from ASIC, the company can make their IPO.

Any investor can generally buy an IPO but it may be challenging for some to get a hold of.

To ensure their first offering will sell out, companies often target institutional investors, making it challenging for retail investors to get a piece of the share piece. Retail investors will usually have to engage with a stockbroker and have a broking account to give them a shot at securing a share.

If you’re an investor, whether you gain access to a specific IPO also comes down to the brokerage house you use; this is because some receive more allocations than others. You could also be limited by the number of shares you can buy or, in some cases, you’ll need to invest in a certain amount to make a purchase. Brokers can also be selective about who they inform about each IPO, and if you don’t receive the news about the IPO you’ll likely miss out on it. A final challenge you may come across as an investor is the risk of an IPO being oversubscribed; to avoid missing out, you should contact your broker promptly to get in early.

If you’re unable to access IPOs, you may still be able to invest in a growing business, by investing in a stock when it’s first listed on an exchange.

There are a series of steps you’ll need to take to invest in an IPO, as outlined below.

Some things to keep in mind: typically, the amount of shares that you have been issued isn’t laid out until the float date, and if an IPO has oversubscribed you may miss out completely.

Before investing in an IPO, it’s important to read the prospectus closely and understand exactly what you’re buying into. To work out whether an IPO is reasonably priced and a sound investment, you should consider long-term growth; the anticipated balance sheet post float; what the company expects to earn; and the broader industry.

Ultimately, deciding whether or not to invest will depend on your investment strategy, investment goals, personal circumstances, and risk tolerance. If you’ve got your sights on long-standing companies, investing in IPOs may steer you in the wrong direction; however, if you’re looking for stocks with growth potential IPOs are an option, although a potentially risky one.