10th July 2013
Hargreaves Landown says that the success of Direct Line and esure share offers have reignited the interest in IPOs as the Government prepares for the privatisation of the Royal Mail confirmed by business secretary Vince Cable on the BBC.
Richard Hunter, head of equities says the offer may be reminiscent of the Tell Sid campaign which promoted the shares of British Gas to the public. The firm has produced this Q&A for investors interested in the share offer but who may not have much experience is this type of investing. It does plug HL’s services, but it strikes Mindful Money as rather useful if you are new or newish to share dealing.
Tell Sid? – Investing in an Initial Public Offerings (IPOs) Q & A
What is an IPO?
An Initial Public Offering (IPO) is where the owner(s) of a company sell all of part of their stake to the public in order to raise money. This cash can then be used to grow the company or simply be returned to the owners. An IPO is also commonly called a flotation.
An IPO may only be made available to institutional investors or to a mixture of private (retail) and institutional investors. An IPO happens in three stages.
1. The Intention to Float – The company announces to the stock market, public stating they wish to float the company
2. Preparation of Prospectus – The company will then prepare and release a prospectus. This aims to be the definitive document relating to the launch and will describe the offer in detail. Applications to buy shares in an IPO should always be made on the basis of the information contained in the prospectus
3. Sale of shares – The company and their advisers invite applications for the shares. The IPO will be open for a fixed time known as the Offer Period
When will the share price be known?
In some cases, fixed price offers are made and the investor will know the share price in advance. Alternatively the share price will not be known until the date the company floats. In some cases the company will provide an indicative range for the flotation price of the shares e.g. £2.00 to £2.20. The precise price won’t be fixed until near the listing date and may depend on demand for the shares. Once the share has floated on the open market, the price will the rise and fall as all other shares do.
Why would investor want to get buy shares at IPO?
An IPO allows investment in a company when it first enters a stock market.
When will shares go on sale?
The timetable for an IPO generally spans four weeks. An Intention to Float announcement is made and then around two weeks later the prospectus is issued and the offer period starts. It is during this period investors can apply for shares.
Where can investors get a prospectus for an IPO?
Interested investors should contact a stock broker who will be able to register your interest in receiving a prospectus. In some cases a stock broker will provide research and updates as information becomes available. For example, Hargreaves Lansdown has been involved in the majority of IPOs over the last 30 years.
How do investors buy IPO shares?
Investors can buy IPO shares through a stockbroker. A share dealing account should be opened and money deposited to buy the shares. This can be done online or over the telephone using a debit card, or alternatively a paper application accompanied by a cheque can be used.
How many shares can investors buy from an IPO?
There is normally a minimum number – If the offer is oversubscribed investors may not be able to buy all the shares they want to buy. If this is the case the balance of money can be used to buy other shares or can be refunded.
Can investors buy IPO shares through an ISA, SIPP or Junior ISA?
In some cases money in an ISA, SIPP or Junior ISA can be used to buy IPO shares. This depends upon which market the company is listing upon and the type of IPO.
What dealing costs are paid?
Buying IPO shares is often free for investors. Hargreaves Lansdown’s charges are as follows:
IPO share purchase
Share account charge Nil (Other charges to hold shares may apply e.g. in ISA and SIPP (ISA – 0.5% capped at £45 a year, SIPP – 0.5% capped at £200 a year).
Selling IPO shares will be subject to a dealing charge from £5.95 and no more than £11.95 (online).
Buying IPO shares after the offer period, when the shares are available in the market, will be subject to a dealing fee of no more than £11.95 (online) plus stamp duty of 0.5%.
Is there a minimum holding period? How quick can an investor sell?
There is no minimum period, but generally it takes 3 working days from the date of the float to issue the shares and selling cannot practically happen before then.
How will investors be able to sell IPO shares?
This is easy. Simply choose when and how many to sell, and execute the deal online or alternatively instruct a sale over the telephone. Dealing online is almost always cheaper than dealing over the telephone.
Will there be a dividend from IPO shares and if so, how will they be paid and when?
This depends upon the company. The prospectus will normally detail any proposed dividend policy.
How will investors find out if there are any special discounts or shareholder perks?
If there are any, they will be detailed in the prospectus
What are the risks?
The value of shares will fall as well as rise, so investors may get back less than they invested. Dividends are not guaranteed and, if paid, are variable. During the period between the Intention to Float being announced and the start of the offer period, the intention may be withdrawn. This rarely happens.
A company which is the subject of an IPO may not have a long track record and could be difficult to value or calculate a fair price. In many IPOs investors do not know the share price before committing to buy and therefore may end up buying at a higher price than they wished.
Investors should read the prospectus and any supplementary documentation as this will include the main risks of investing.