You’re reading one of our posts from the ‘stockbroker excellence’ series. In this series, we take a look at the different features which help the best UK stockbrokers stand apart from one another. This post focuses on the different levels of access that stockbrokers provide to Initial Public Offerings or IPOs for short.
2020 and 2021 have seen a bumper crop of IPOs. An incredible 460 companies listed on US stock exchanges for the first time in 2020. This number was far lower in the UK, with 23 companies seeking a listing during that calendar year. But this still represents a boom for investment banking (see books) and a flurry of choices for UK investors.
The decision whether to participate in an IPO is difficult. Some investors decide to never engage in the IPO process, others are more selection. But a third group of investors are blocked from participating in IPOs simply because their FCA regulated broker account doesn’t allow them to. But which stockbrokers enable IPO participation and which ones don’t? And what does it really mean to participate in an IPO?
What does it mean to participate in an IPO?
If you successfully join an IPO, this means that you will be assigned ownership of the first shares which are released into the public domain on the day of the listing. These shares may be new shares created afresh on the day (in which case, the funds you use to buy the shares will go to the company to finance their operations) or they may be existing shares being sold by a previous shareholder.
After an IPO has taken place and the original allotment of shares has been assigned to those who subscribed in the issue, the trading of shares for that company will look just like any other. I.e. an investor or trader can search for the company name in their Stocks & Shares ISA (See comparison), and place an order to buy the shares.
So what is the real difference between being given an allocation of the original share issue, versus buying the shares on the secondary market in the minutes after? The answer is the price and how it is set.
The price paid through the initial offering can be set through a number of mechanisms, including auction or a flat price agreed upfront. This is different to the simple supply and demand marketplace of the stock market. This presents occasional opportunities to investors where they believe the offer price is lower than the underlying value of the business.
Where demand for a companies shares is extremely high, it is possible that IPO participants will invest in the issue at one price (e.g. £60 per share), and then see the market price on the secondary market ‘pop’ or jump up to a much higher price almost immediately.
This famously occurred during the privatisation of Royal Mail in 2013. The price for the initial offering was fixed in advance at £3.30 per share, which was widely regarded to be a bargain price for the company. Demand for the shares was so high that hundreds of thousands of individuals applied for a piece of the IPO.
By the close of the first day of trading, the shares were quoting a value of £4.45, resulting in a 35% profit on paper for any individuals who won the application lottery and were successful in receiving shares through the IPO.
For more information about investing in IPOs in general, please read our guide to what is an IPO and how to invest in one.
Do all UK stockbrokers give investors the chance to participate in IPOs?
The quick answer is no; only select stockbrokers allow their clients to participate in IPOs. The IPO process is complex and completely different to ordinary share dealing. Some stockbrokers have made the commercial decision to not offer this service to clients, on the grounds that it wouldn’t be economical or that they wish to keep their offering as simple as possible.
Which UK stockbrokers allow clients to invest in IPOs?
IG Share dealing account (See their IPO policy)
Charles Stanley Direct (See their IPO policy)
Barclays Smart Investor (See their IPO policy)
This list of stockbrokers providing support for clients participating in IPOs is not exhaustive.
In general, we noticed that well-established brokers are the most likely to offer IPO access. This is probably because it’s a ‘nice to have’ feature – not a core feature. Therefore, mature players in this market will offer the service to respond to client demands. But on the other hand, recent UK investing apps which are still being developed on the back-end are unlikely to prioritise adding IPO functionality before they perfect the standard features of their trading platform.
Primary issues of equity in the private markets
While IPOs attract the largest headlines, there is another category of primary issue: private equity. While private equity conjures up the image of listed private equity firms and venture capital trusts, there is another route into this asset class that is available to everyday investors; crowdfunding.
The best crowdfunding platforms provide retail investors with a range of small to medium businesses seeking to raise fresh capital to fund their growth phases. In our Funderbeam review, we noted that 6 live pitches were available to invest in at the time of writing, and a further 73 companies were on the secondary market.
There are greater risks when investing in private market equity compared to IPOs because of the lower regulatory requirements on the part of the company raising finance. In preparation for an IPO, a stock market entrant must submit the last three years of financial statements audited by an independent auditor. IPO’s will also generate more publicity and coverage by analysts and journalists, creating a level of ‘free due diligence’ which retail investors can read for free.