This is the second article in a series of blogs that we are publishing on the back of Stockopedia research into the performance of IPOs (initial public offerings). The IPO Survival Guide examined 258 IPOs between 2016 and 2021 - and one of the most interesting findings involves the all-important ‘issue price’.
The issue price is the level at which an IPOing company and its advisers ‘price’ the shares before they begin trading publicly for the first time.
Based on our sample of IPOs, buying at the issue price virtually guarantees you a profit on the first day of trading. In fact, the first-day ‘price pop’ led to a profit, on average, 90% of the time.
The problem, of course, is that because of the way IPOs are usually structured, most private investors don’t get the opportunity to buy at the issue price. This puts them at a big disadvantage.
The Issue Price - where the City profits, and private investors aren’t allowed in
To understand why the issue price is so important - yet so inaccessible to private investors - it’s worth looking at some basic IPO mechanics.
IPOs are a popular way for companies to raise the capital they need to fund their growth ambitions. They also enable existing owners and directors to sell some or all of their holdings in a company.
To make this process as efficient and low-risk as possible, investment banks and brokers like to secure large orders for chunks of shares upfront from their major clients. Normally, these are institutional investors.
It’s reasonable to think that the company and its advisers will seek to achieve the highest price possible. But the sceptical onlooker might deduce that in exchange for pledging to buy big portions of shares, the institutions are offered an issue price that bakes in room for an early profit.
First day profits are never guaranteed, and some IPOs do fall at the open, but Stockopedia research shows that price pops are the norm. This means that the unwary private investor - whose first chance to buy shares in a new IPO is usually on the first day of trading - is already at a major disadvantage.
This is a great shame because our analysis found that of the 237 IPOs that experienced a price movement from the issue price compared to the opening price, 211 were…
