How To Invest In IPOs? How do IPOs Work?

What Happens After the IPO?

The IPO goes live on the morning of its public listing. This is 8 am on the London Stock Exchange, meaning that the shares will hit the secondary market as soon as the opening bell rings for trading. When it does, shares will change hands between buyers and sellers. Although we cover this in more detail further dow -as an everyday investor, this is your best chance to get in on the action early.

Nevertheless, from the moment the shares open for trading, the value of the stocks will go up and down much like any other publicly-listed firm. It is therefore hoped that your IPO investment will increase in value from day one. Of course, there is never any guarantee that this will be the case – just as it wasn’t for Uber in its 2019 listing.

What Does an IPO Investment Look Like?

Understanding how IPOs work as a newbie investor can be somewhat difficult at first glance. As such, below we give a real-world example of how an IPO investment would have worked had you backed Royal Mail in 2013.

  1. Royal Mail decided to go public in 2013. It wanted to provide access to everyday investors – so it paved the way for retail clients to invest in the pre-IPO directly. As a result, the IPO was heavily over-subscribed.
  2. Royal Mail required private investors to buy at least 227 shares. In total, 225 million shares were issued, at a price of 330p per share.
  3. This equated to a pre-IPO valuation of £3.3bn.
  4. Let’s suppose that you obtained the minimum allocation of 227 shares – meaning that you invested a total of £749.10. (227 shares x 330p).
  5. At 8 am on October 13th 2013, Royal Mail shares went live on the London Stock Exchange. This means that those holding the shares could sell them to new buyers on the secondary marketplace. As the stock exchange is based on market forces, this means that the price of shares are dictated by demand and supply.
  6. As supply significantly outweighed demand, Royal Mail shares closed the trading day at 455p each.  This represents an increase of 38% in just a single day.

As you can see from the above example, those that made the decision to invest in Royal Mail’s IPO before the public listing made a very tidy profit of 38% after just one day of trading. Based on an initial investment of £749.10 (227 shares), selling your shares would have returned a total of £1,032.85.

The company in question will initiate a public marketing campaign that gives details of the IPO

  • It will state the minimum and maximum investment amounts, and the price of each share
  • You will need to submit an application detailing how much you wish to buy
  • Once the deadline passes, the company will assess how much demand it has received. If the shares were undersubscribed, you will be instructed to make a payment.
  • This can typically be done via the company’s website or over the phone. In the case of Royal Mail, the firm allowed the general public to invest via their local post office branch
  • If the shares are oversubscribed, the company will likely distribute its shares on a first-come-first-served basis, meaning that late-comers might miss out (much like in the case of Royal Mail)
  • Once the company has concluded its pre-IPO reconciliation, you will likely receive a copy of your share investment via email or the post.

It is important to note that a direct IPO investment is typically reserved for public companies that have been privatized. As such, in the vast majority of cases, this likely won’t be an option for you.

Option 2: Invest in Pre-IPOs via a UK Stock Broker

The second option at your disposal is to use a UK stock broker that has direct access to the IPO. The way this works is the stock broker will meet a minimum lot size with its own capital. For example, if the IPO states a minimum investment of £500,000 – the broker will purchase at least this amount. If demand is higher, it might choose to purchase even more.

In most cases, the stock broker will release information on its website about the IPO, subsequently allowing you to register your interest. Then, once the investment has been made and the shares have been distributed to the broker, you will receive them. As we briefly noted earlier, there are very few brokers in the UK that give everyday investors access to IPOs.

Nevertheless, we find that Hargreaves Lansdown is particularly strong in this arena. As such, below you will find a step-by-step guide on how to invest in an IPO with the platform.


Kane Pepi

About Kane Pepi

Kane Pepi is a British researcher and writer that specializes in finance, financial crime, and blockchain technology. Now based in Malta, Kane writes for a number of platforms in the online domain. In particular, Kane is skilled at explaining complex financial subjects in a user-friendly manner. Academically, Kane holds a Bachelor’s Degree in Finance, a Master’s Degree in Financial Crime, and he is currently engaged in a Doctorate Degree researching the money laundering threats of the blockchain economy. Kane is also behind peer-reviewed publications - which includes an in-depth study into the relationship between money laundering and UK bookmakers. You will also find Kane’s material at websites such as MoneyCheck, the Motley Fool, InsideBitcoins, Blockonomi, Learnbonds, and the Malta Association of Compliance Officers.