Discover how investing in IPOs could give you an investing edge.
An IPO (or Initial Public Offering) is the first time that stock of a private company is made available to the public on the sharemarket.
Before an IPO, a company is usually owned by its founders, employees, and a small group of investors. After an IPO, everyday investors can buy pieces of the company on the sharemarket.
When a company’s owners decide they want to grow the company’s capital, they can sell part of the company publicly in the form of an IPO. Here, they will split the ownership of the company into small pieces, which become publicly traded shares on a stock exchange. Throughout every IPO process, brokers such as CommSec are chosen to help the company in their transition to the public market.
On listing day, the company will be officially listed on the stock exchange (such as the ASX) and everyday investors can buy a piece of the newly listed company.
The price of an IPO is heavily dependent on consumer demand for the company’s shares; strong demand leads to a higher offer price. Other elements that can influence a company’s IPO price includes the story of the company, growth prospects, competitors in the market and the companies position relative to those competitors.
For a company, going public could raise capital and revenue, or aim to help maximise shareholder value.
For investors, IPOs could provide an opportunity to invest in a company’s growth from an early stage. This means that investors could benefit from short-term gains as IPOs are often priced lower than the perceived value of the company. This may lead to increases in stock price once trading on the open market begins.
Investors may also find that investing in IPOs can contribute to the diversification of their investment portfolio as investing in IPOs can balance out risk by having a mix of securities from different industries and stages of growth.
Like any investment, there are risks associated with investing in IPOs. Always thoroughly read the Prospectus which provides important information about the company such as business models, financial statements and risk factors. You can also mitigate risk by maintaining a diversified portfolio and avoiding putting all your assets into one IPO as they can be high-risk and volatile investments. Other risks include:
Price volatility during the early days of trading as share prices can move rapidly based on demand and market sentiment.
High uncertainty as many IPOs have limited publicly available records making it hard to assess the company’s value and long-term performance.
To buy shares in a retail IPO where made available by CommSec, you need to apply through the CommSec IPO centre rather than buying directly on the market before listing day. Here’s how the process usually works with CommSec:
If you’re not already a CommSec customer, open an account. Some IPOs may also require you to have a CommSec International Shares Account.
Once your CommSec account is set up and the offer opens, you will be able to access the Prospectus and apply to participate in the offer through CommSec. Ensure you read and consider the Prospectus carefully before deciding whether to invest.
After you apply, you will have to wait for allocation. You may receive full, partial or no allocation of shares, and refunds are sent for any unused funds. IPOs can also be undersubscribed, meaning there could be shares that are unsold before the official release date.
Once the IPO is listed, the shares will appear in your CommSec portfolio, allowing you to trade them normally. Delivery of your allocation on listing day is subject to best endeavours.
You can view the Share Trading Terms and Conditions, International Shares Terms and Conditions, Best Execution Statement and Financial Services Guide (FSG), and should consider them before making any decision about these products and services.
Investing in overseas markets exposes you to risks including those related to movements in foreign currency exchange rates and market prices. Investing carries risk.
The Commonwealth Direct Investment Account is issued by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. This product is administered by Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia. You can view the CommBank Transaction Savings and Investment Account Terms and Conditions and Financial Services Guide, and should consider them before making any decision about these products and services.
The target market for this product can be found within the product’s Target Market Determination, available here.
