How do I buy an IPO stock?

Divik Nigam

How do I buy an IPO stock?

What is an IPO?

An initial public offering, or IPO, is the process by which a private company converts to a publicly-traded company on an exchange for the first time. Being exposed to the stock exchange, allows a company to raise capital from a wider range of investors and can provide an opportunity for pre-existing investors to sell down their position whilst simultaneously diversifying their investor base.

When a company decides to launch an IPO, they are required to lodge a prospectus with ASIC, a detailed document that outlines the offering, audited company financials, key risks, and a number of other factors as well as meeting certain regulatory requirements. This prospectus is extremely detailed and has the necessary information and knowledge required for investors to make a calculated decision on whether an investment into the IPO is necessary and worthy.

IPO graph outlining a private company transitioning to a public company through an IPO.

How can you invest in an IPO?

To invest in an IPO you will have to go through a broker and have a brokerage account open with them.

When applying for an allocation in an IPO there will likely be a minimum number of shares and in some instances, there may be a maximum number of shares you can subscribe to. This is often disclosed within the IPO offering documentation and usually translates to a minimum or maximum monetary investment needed. Hence it is also crucial to be cognizant of the portfolio allocation, ensuring that over-allocation and a lack of diversification is not a direct consequence of your IPO investment.

After deciding to invest in an IPO and determining your desired position sizing, you will be required to complete an application form that can be found in the prospectus or obtained from your broker, and the accompanying investment should be mailed (check) or be organized via a direct deposit.

After completing the paperwork you may not know how many shares you are issued until the float date, and in some instances, it may be less than you applied for or none at all.

As for retail investors, it can be difficult to get an allocation because priority is given to institutional investors and retail allocation sizes vary from broker to broker. If you are unable to get an allocation or the desired size you can still invest when the company begins trading on the exchange through on-market purchases, although it will likely be at a higher price than the IPO. However, company’s do offer “Share Purchase Plans” to investors, which is almost identical to the “equity raising”, however, the buy-in price may be at a different discount.

Alternatively, if further assistance is needed, the investor relations department of the company which is about to IPO will be available to assist you if needed. Their contact details are usually available on the “Investors” section of the company’s website.

Factors to consider before investing in an IPO

As is with all investments performing an in-depth analysis is required, in the case of an IPO the prospectus provides a good starting point for company analysis.

The prospectus is key documentation and contains a(an):

  • In-depth analysis of the potential risks/catalysts of company’s operations
    • Risks depend on the company’s industry, however are usually based around:
      • Technology risks, commercial risks, regulatory risks, COVID 19 risks, foreign exchange risk (repatriation of funds), commodity risks, employee risks, funding risks.
  • Detailed explanation of how the company generates revenues
  • Summary of the Board’s qualifications and experience, as well as remuneration policies
  • Potential ESG considerations
  • Company-generated guidance on revenue and earnings growth over the next few years
    • This is vital in order to perform valuations to find a stock’s intrinsic value (Discounted Cash-Flow (“DCF”) Technique)
  • Commentary on the industry, as well as an outlook as to how the management views industry growth moving forward

Furthermore, it is crucial to understand the ‘why’ behind the company undertaking an IPO. IPO’s offer the company access to the stock exchange, and hence more easy access to funding, thus the intention behind what the management team plans to do with the capital that is raised, is vital to keep in mind (often disclosed in the prospectus document). Key uses of capital include:

  1. Funding international or geographic expansion
  2. Expanding into a new vertical
  3. Improve their product via R&D (research & development), or alternatively, expanding the product list

However, ‘raising capital’ may be a distraction for the IPO simply being an opportunity for existing investors to sell down their positions and realize gains. These investors may even be the company directors or executives, so care and due diligence should be undertaken before proceeding.

Key due diligence should be stressed as the key document that you will be analyzing (i.e., prospectus), is released and constructed by management teams themselves, that is, the same group that is in need of capital. This conflict of interest delineates the vitalness of making sure that the investor is able to separate biased responses, from independent and neutral facts, of course via the exercise of personal judgment. The following paragraph(s) offer a brief guide that outlines important determining factors of performance and can be followed whilst reading the prospectus.

What is an IPO? Image of shareholders at the New York Stock Exchange

Maqro’s essentials when investing into an IPO

  • How that sector has performed recently – is there strong investor sentiment?
  • Are there strong cornerstone investors in the IPO?
    • What is the opinion of existing shareholders? Are they selling, if so, why?
  • Has the offering been oversubscribed?
    • Is there robust demand for the company’s shares?
      • How long-lasting is the demand? Is it transient, due to “hype” or “FOMO”, or could it be attributed to the fundamental strength of the company?
    • A highly oversubscribed IPO is more likely to perform strongly and the beginning of trading.
      • “Hype stocks” are IPOs that involve positively-biased opinions about the company, which can often distract investors from considering the company’s risks.
  • What are they using the capital for?
    • Is it to fund expansions or are existing shareholders just using it to sell down?
  • Conduct basic bottom-up analysis:
    • Valuation, consideration of risk, assess profitability of future operations, expansions, exercise judgement on skill of management team.

It should be noted that an IPO company’s share price, upon listing, is highly volatile. This volatility stems from shareholders who were unable to participate in the IPO stage, now having access to purchasing the shares, as well as exiting shareholder participants in the IPO stage, now being able to sell their shares (and book a potential profit). More commonly, investors can generate a lot of excitement, which can be channeled via social-media conduits such as articles/threads/blogs, etc., and this so-called “excitement”, is a cause of concern. Albeit this excitement may translate to share price appreciation during the short term following an IPO, the excitement will eventually fade away and investors will be able to more transparently assess the company’s risks. If the excitement was enough to distract investors from key crucial risks, the share price will eventually fall and losses may be booked. A great example of this is Nuix (ASX:NXL), whose fundamentals seemed attractive enough to distract investors from a very turbulent and unreliable management team.

Investing in an IPO comes with more risks than other investment opportunities and you should not forget that the share price can go down once listed.

Upcoming IPOs on the ASX

There are a number of upcoming IPOs that retail investors can participate in that can provide various profitable opportunities. The current landscape of the ASX, which is skewed towards mining companies, is mirrored for most upcoming IPOs. Instead of miners which have already commenced operations, the upcoming IPO miners are usually in their ‘exploration’ phase – which implies that the company is chasing capital in order to fund the capital expenditures required to commence drilling. This adds an extra layer of risk, i.e., the risk of the mining operation not being profitable, however, with extra risk, may come extra returns, which emanates from the miners usually listing at extremely low prices, implying that substantial upside could potentially double or triple your investment. A key example of this is Pan Asia Metal (ASX:PAM) which, within a week, rose 273% on the back of a successful mining operation. 

There are a number of upcoming IPOs that you can participate in, to do so contact your Maqro Capital representative.

  • List some IPOs of note that are upcoming
    • Copper Search – 9th September
    • X2M Connect Ltd – 10th September
    • Zoom2u Technologies Ltd – 10th September
    • Culpeo Minerals Ltd – 10th September
    • Iris Metals Ltd – 10th September
    • Mt Malcolm Mines NL – 10th September
    • Legacy Minerals Holdings Ltd – 13th September
    • Pearl Gull Iron Ltd – 13th September
    • Way 2 VAT Ltd – 14th September

Find out more here, including company contacts, principal activities, issue price and type, capital to be raised, and more.

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