What is an IPO and why might you, as an investor, be interested in being involved in one?
These are important questions for an investor given that in Australia there are a reasonable number of IPOs a year.
These are important questions for an investor given that in Australia there are a reasonable number of IPOs a year.Explore the topics below to find out what you should look out for if you are considering investing in an IPO.
What is an IPO?
An IPO or an initial public offering is when a company seeking capital, ‘floats’ shares to the public for the first time.
The IPO allows the company ‘offering’ their shares to tap a large pool of investors to provide it with capital for future growth, repayment of debt or even for working capital.
Floats or IPOs are generally undertaken by smaller companies looking to expand or by large privately owned companies who want to become publicly traded.
Why do companies float?
There are a number of reasons why a company may consider offering their shares to the public. It can:
- provide cheaper and quicker access to capital
- attract and retain better management and employees
- assist with the purchasing of other companies
- add to the liquidity for existing equity holders
- provide greater exposure and prestige.
But there are some disadvantages:
- significant legal, accounting and marketing costs
- ongoing requirement to adequately disclose financial and business information
- a risk that the required funding will not be raised
- significant time, effort and attention of senior management.
How do I invest in an IPO?
There are a few things that you need to keep in mind if you are considering investing in an IPO:
- to invest you need to complete an application form that can be found in a prospectus and this can usually be obtained from your broker. Some brokerage houses with some floats get more allocations than others
- you may be limited by the maximum number of shares you can subscribe to or there may be a minimum
- generally you will have to complete an application form and either mail off a cheque or organise a Bpay or direct deposit.
- you may only have a defined time period, usually about three weeks, to complete your IPO paperwork and get it sent in.
- you may not know how many shares you have been issued until the float date. If an IPO is oversubscribed you may even miss out if you wait too long to get your paperwork in.
For more information see Pre-IPO Investing: How does it work and is it worth the risk?
Where do I get more information?
The ASX list upcoming IPOs, see the list here.