Getinvested campaign gains momentum as UK eyes retail capital markets reform
Following the launch of the Getinvested report, the initiative has been widely welcomed by the UK Regulator and Members of Parliament.
Explaining IPOs
What is an IPO?
An IPO, or Initial Public Offering, is when a private company offers its shares to the public for the first time on a stock exchange, and people can buy a piece of the company and become shareholders.
Companies usually go public to raise money to grow their business, pay off debt, or gain more visibility. Once a company is public, its shares can be bought and sold by anyone through a stock exchange, such as the London Stock Exchange (LSE) or Nasdaq.
The IPO Process
An IPO requires careful planning and approval from the company's board of directors. First, the company hires advisers, including investment banks, to guide them. This group is often called the IPO readiness or underwriting team, and they help:
- Set the right price for the shares
- Prepare legal and financial documents
- Market the IPO to investors
Next, the company files its Registration Document and Admission Document / Prospectus with the appropriate financial regulator, such as the Financial Conduct Authority (FCA) in the UK. The prospectus helps ensure transparency and protects investors by explaining:
- What the company does
- How it makes money
- Risks involved
- How it plans to use the money raised
Once the FCA approves the documents, the company and its bankers set an initial price range for the shares before going on a "roadshow" - a series of presentations to investors to build interest and excitement. This helps gauge demand and narrow the price range.
Based on investor interest, the company and its bankers decide on the IPO price - the price at which the shares will be sold to the public. Judging an appropriate price is a crucial but difficult step, requiring a balance between how much money the company raises and how the stock performs on day one.
On the day of the IPO, the company's shares are listed on a stock exchange, and anyone can now buy or sell the shares. The company's stock price will now rise or fall based on financial performance of the company, sector news, and market trends, and the company must follow strict rules designed to protect investors, including:
- Regular financial reporting
- Transparency with shareholders
- Accountability to the public
Typically, an IPO gives you the chance to invest in a company at a relatively early stage, but it also comes with risks - prices can be volatile, especially in the beginning.
Capital at Risk
Investing in securities involves a significant degree of risk including loss of capital, rarity of dividends, lack of liquidity and potential for dilution and should only be done as part of a diversified portfolio. The value of an investment and the income from it could go down as well as up. The return of your investment is not guaranteed and you may get back less than what you originally invested. Past performance is not an indicator of future performance. It is important that you read the Risk Warnings in the prospectus before considering any investment. This is a financial promotion.
Advantages of "Going Public"
Although being a public company means more rules and requires greater transparency, there are several attractions for a private company:
Access to Capital
Public companies can raise money by selling new shares to investors which can be used to fund expansion, research, or reduce debt.
Attracting Talent
Public companies can offer stock options, which can help attract and retain employees.
Use of Shares as an Acquisition Currency
Public shares can be used as a form of payment when acquiring other businesses.
Increased Visibility and Credibility
Being listed on a stock exchange makes the company more recognisable to customers, partners, and the media.
Improved Liquidity for Existing Investors
Early investors and employees can sell their shares more easily, turning their investment into cash.
Market Valuation
The company's value is determined by the market, offering real-time feedback on performance and investor confidence.
Why Participate in an IPO?
Although IPOs come with risks and the share price can be volatile, there are a number of benefits to taking part:
✓Early Access to Growth
IPOs offer a chance to invest in a company at the start of its public journey - potentially before it grows bigger and more valuable.
✓Enhanced Accountability
Public companies must share detailed financials and business plans, which help investors make informed decisions.
✓Improved Governance
Shareholders are able to exercise voting rights on issues such as executive remuneration or strategic direction.
✓Diversification
Spreading risk across different stocks and industries can lower the volatility of your portfolio.
✓Greater Liquidity
Shares that trade on a recognised exchange can be readily bought and sold.
✓Potential for Higher Returns
If the company performs well, early investors could see stronger returns.
The Risks of Investing in an IPO
⚠Price Volatility
IPO stocks can exhibit significant price volatility, especially in the first few days or weeks of trading.
⚠Lack of Information
While IPO filings provide significant disclosures, they still may not give the full picture and there remains a high degree of uncertainty as to the company's success.
⚠Lock-Up Periods
Whilst insiders typically are not able to sell their shares for a few months after the IPO, their selling can cause the stock to fall in value.
⚠Limited Track Record
Many companies that IPO are young and fast-growing but have limited financial history which makes it harder to judge their potential.
⚠Motivated Sellers
Understanding the rationale of the selling shareholders is an important component in determining the value of an IPO.
⚠Poor Performance
Individual stocks can deliver negative returns which means you may face a loss of capital.
Disclaimer
Retail Book Limited ("RetailBook"), a limited company registered in England and Wales (company no. 14087330) with its registered office at 10 Queen Street Place, London, United Kingdom, EC4R 1AG. RetailBook is authorised and regulated by the Financial Conduct Authority (FRN 994238). This document has not been reviewed or approved by any regulatory or supervisory authority.
The information in this document is for background purposes only and does not purport to be full or complete. All information contained herein is subject to updating, revision and/or amendment (although there shall be no obligation to do so). No reliance may be placed for any purpose on, and no representation or warranty is given in relation to, the information contained in this document or its accuracy or completeness. This document should not be considered a recommendation by RetailBook in relation to any subscription for securities, whether actual or in the future.
Recipients of this document should not construe the contents of this document as legal, tax, investment or other advice (and should consult their own professional advisers if they are in any doubt as to the implications of any investment).