Understanding How the Initial Public Offer (IPO) Works

A company does not just decide to go public one day. It happens, though very rarely. A firm that wants things done right must go through the due process of hiring an investment bank tohandle the IPO. Once that is done, then it is set tohit the road running and raise funds through the sale of shares.

The IPO (Initial Public Offering) is the vehicle the company uses to go public in order to sell shares to the general public and raise funds. There are two types of IPOs:

• Fixed price
• Book building

1. Fixed Price

The company decides on a fixed price for the shares to be fronted to investors. The investors are therefore aware of the price before the public is made aware. This is a very advantageous position to find yourself in as an investor. You have the chance to be a part of this IPO but you must pay the share price in full when you apply to participate. The share prices you find on platforms like Lloyds share prices are arrived at this way.

2. Book Building

The company offers investors a 20% price band on the shares, who then bid on the shares to settle on a final price. Once they have agreed on the share price, the bidding is closed. Investors are at liberty to choose the number of shares they are willing to purchase and at what price. There is no fixed price per share here. Instead, they have the floor price and the cap price.

What You Need to Know When Participating in an IPO

There are a few specifics that you should be awareoff when taking part in an IPO.

• Issue name: this is the name of the company that is going public.
• Issue type: the type of IPO; fixed price or book building.
• Category.
• Price band.

Categories of IPO

There are three of them:

• Retail investors
• Non-institutional investors
• Qualified institutional players

What is the price band?

This is the range (the lowest price and the highest share price) that is decided upon for book building purposes.

Underwriting

As mentioned earlier, a company going public needs the services of an investment bank. The bank takes charge of the IPO. More than one investment bank can be involved in this process in order to spread the risk amongst the banks involved. This is known as underwriting.

Once the company and the investment banks agree on the underwriting, a registration statement is prepared by the banks. The registration has all the financial details of the IPO such as:

• The names of the board of directors.
• Financial Statements.
• Legal requirements.
• Applications of the finances.

Once all thepaperwork is duly signed and approved by the relevant authorities, they set the date for the IPO.

When a company goes public, it does so in order to raise capital from shareholders. While that alone is an advantage, investors and the public are made aware of the existence of the company and its dealings.

You would be at an advantage as an investor to participate in an IPO and have an edge over the general public in getting to determine the share price as well the number of shares you want to buy then find the share price posted on a trading platform like Lloyds share prices to your delight.