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Should I buy into an IPO? Six points to consider

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15/05/2014
A growing list of companies is set to join over-50s specialist Saga in launching initial public offerings (IPOs) over the coming weeks.

TSB, Zoopla, Travelex and DFS are just some of the names rumoured to be eyeing a stock market flotation, following in the footsteps of recent listings by Rightmove, Poundland and of course, Royal Mail.

For investors interested in buying into an IPO, the normal rules apply. They should use their own judgement and investing skills to decide whether or not the company is set to do well over the long-term.

However, there are additional factors to consider before taking the plunge and buying a new issue.

The experts at Trustnet Direct, the direct to consumer investment platform, reveal six key considerations:

Stamp duty

Unlike other share transactions, IPOs are exempt from stamp duty, so buying at this stage means you save an effective 0.5 per cent as opposed to buying after public trading has commenced.

Dealing fees

Again, there are no dealing fees when you apply direct and typically a stockbroker will not charge you if you apply for an IPO through them, either.

Depending on how much your broker charges you to trade, the savings here will fluctuate. Note that the broker receives a commission of typically 0.75 per cent from the issuer for shares it successfully places with investors.

Discipline

Retail investors frequently struggle to commit to making a trade. Engaging in an IPO gives the discipline to get involved in the market and assuming that this is being seen as a long-term investment, mis-timing the purchase shouldn’t be a major concern.

Opportunity cost

Investing in an IPO involves committing money to the application on the assumption that you will be awarded the shares you apply for. In the current era of low interest rates there is little cost incurred if you are using cash for offers like this. However, liquidating other equity holdings to participate in an IPO comes with the risk that your application is unsuccessful, leaving you with uninvested cash for a period of several weeks.

It’s rarely free money

At an IPO, the listing company wants to achieve the very best price it can and in the majority of instances this does happen. However, privatization of state assets tend to be high profile and can also buck this trend, as the government  wouldn’t want the political embarrassment of a sale being unsuccessful. The quick profits made in the Royal Mail IPO shouldn’t be taken as the natural course of events for any listing.

It might be a flop

The shares issued in an IPO are underwritten – for what is essentially an insurance premium – by a group of banks. That is, if they can’t be sold in the market then this panel of institutions will pick up the slack. They may then decide to sell the stock quickly, driving the price immediately lower and leaving investors out of pocket.

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