What is an IPO?

An IPO stands for Initial Public Offering and is also known as a ‘listing’ or ‘going public’. It’s the first sale of a company’s shares to the public. This is done by listing shares on a stock exchange such as the London Stock Exchange, Nasdaq or Euronext.

Read our in-depth guide to IPOs

Why do companies go public?

A company may choose to go public for several different reasons, depending on its circumstances. The most common reason is to raise capital which can accelerate further growth, through uses like expansion or paying off debt.

It’s not only established companies that choose to hold an IPO. A company may choose to go public at any point during its lifecycle. The capital raised from an IPO can range hugely depending on the company, its size, and its industry. For example, VISA raised over $17bn when it went public in 2008, but other companies raise far less.

How does the IPO process work?

When a company decides to go public, it will put together a prospectus document that will be distributed to potential investors (subject to FCA approval). This will include information about the company, so investors can decide if they’d like to purchase shares, and if so, for how much.  

With that information available, an ‘offer period’ will begin. This can last between a few weeks and a month, giving potential investors time to review the information and submit bids indicating the price they’d pay for a share and how many shares they’d be willing to purchase. All these bids are private, with no investor knowing the demand from others. At the end of the offer period, shares are allocated to investors based on their applications.

The initial price of the IPO will then be decided by the underwriter, based on demand for the shares, the value of the company, and a host of other factors.

Finally, new shares are issued and listed on the company’s chosen stock exchange. They are now available to be bought and sold by the public and the share price can rise and fall.

What are the advantages and disadvantages of an IPO?

For the investor:

• The opportunity to maximise returns as the company grows
• By entering when the company is first listed, it also gives the investor the longest possible time to invest. This means that investors will benefit not only from price increases, but they could also receive dividend payments and other benefits connected to holding shares for a long time
• Investing in IPOs can be riskier than purchasing established stocks due to the unpredictability of new listings, and the lack of historical data to support the price

For the business:

• An IPO can raise vast amounts of capital and simultaneously increase exposure and raise the profile of the business
• Being publicly traded also makes it easier for money to flow into the company compared to when they’re privately listed
• Public companies are subject to rules imposed by their governing body, including the requirement to publicly disclose their financials, such as accounting and tax information
• The share price can become a distraction for senior management who are often evaluated on this metric, which can impact wider decisions about the business

How do you invest in an IPO?

You can invest in an IPO through our range of investment accounts, including an ISA, SIPP, or Dealing account. IPOs typically have a minimum investment of £1,000, but if all the cash is not used in the purchase, it will be refunded to your account.

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Normally, you won’t pay dealing charges when taking part in an IPO. We'll receive an intermediary fee based on the aggregate value of applications made by our customers for acting as an appointed intermediary. However, if we don’t receive an intermediary fee, we'll apply our normal dealing charge.

Stamp Duty and PTM Levy are also not payable on IPOs.