Initial public offerings are a way for private companies to raise more money from the public, by offering their shares to the public on the stock market. This is an important time for private companies to become more widely available and allow investment access to the public.
Upcoming IPOs can benefit private investors in particular. This is because many IPO companies will include share premiums for their existing investors, so this can result in potential profits. Existing shareholders of a private company will likely include family, friends, and professional investors such as venture capitalists. These private equity investors help to finance companies with high growth potential in exchange for a stake in their equity.
An initial public offering (IPO) happens when shares of a previously private company are offered to the public on a stock exchange. This is part of a new stock issuance. A company that is planning an IPO will select underwriters to manage their financial risk, and chooses a stock exchange in which to feature their newly public shares. When the company goes public, the private shareholders’ shares will value at the same price as the public share. These are usually a higher value and therefore, they will profit from the relative returns that were expected.
In general, companies can register for an upcoming IPO after reaching a market capitalisation of $1 billion, which is the same for a ‘unicorn company’. However, as long as the business can meet the listing requirements for a specific market and prove their potential for future profit, they can also qualify for an IPO.
One of the advantages of IPOs is the ability to raise even more capital in the future. A secondary offering after the initial public offering releases the sale of new stock on the exchange, in order to raise more funds for operations. This, in turn, dilutes the percentage of individual ownership for the original investors, which can cause negative investor sentiment. This will also reduce the quality of important company fundamentals, such as company earnings and P/E ratios for the share price.
Before the IPO occurs, there is sometimes a private sale of a company’s shares before the stock is listed on the chosen exchange. These buyers are usually venture capitalists, as mentioned above, as well as private equity investors, hedge funds and other private investors that aim to profit from a stake in the company in the future. They will also be given a discount from the upcoming IPO price to attract a larger number of investors.
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An upcoming IPO’s share price is speculated before it is actually announced, in relation to its overall revenue and income. However, an IPO can be under-priced if its sponsors cannot predict the outcome of the stock, and if it is well received. This may be due to a lack of public information about the company, so the stock price will emerge higher than the predicted value.
Another theory is that some companies under-price their IPO below market value in order to attract a wider number of investors. Some investors choose to buy stakes in a company that they can afford, rather than having a genuine interest or hope that that specific company will succeed. This way, it ensures that investors will buy up all the shares of the company’s IPO, rather than having some left over.
A number of trading platforms specialise in pre and upcoming IPOs, where you can browse and choose a stock to invest in, before its future IPO is carried out. Once the company is public, however, you can trade it like any other share in the stock market, using financial derivatives, such as futures, forwards and options contracts.
After a company has passed the IPO process and listed its shares on a stock exchange, it will be available for public trading. With us, traders can speculate on the price movements of the underlying share through spread betting and contracts for difference (CFDs), which are both derivative products. These products allow you to trade on price movements without taking ownership of the asset, so you can either go long or short on your position.
Private companies with an upcoming IPO could include rivals to some of the largest companies in the world, within the technology, renewable energy, e-commerce, and healthcare industries, at the very least.
To trade on the price movements of an upcoming IPO stock after it has passed the process, our online trading platform, Next Generation, offers spread betting and CFD trading on more than 8500 stocks and ETFs. It is simple and easy to register for a live account and start trading the share market now.
You can also keep up to date with the latest news and analysis for the stock market, as we keep our online platform updated with daily reports and predictions from our professional market analysts. Alternatively, if you would like to see data from external news providers, our news and insights section offers fundamental analysis stock reports from Morningstar and live updates on the share market from Reuters.
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