How To Prepare For An Ipo On The Stock Exchange and Financial Markets?

Updated: 2 days ago

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Stock markets gather investors and enterprises alike looking to finance their growth, mainly through opening up their capital in the form of public sales of securities. It is on these financial markets that transactions, which for the most part deal with shares, take place daily.


A company "listed" on the stock exchange market actively takes part in the selling of tradable financial assets. In other terms, initial public offerings are made whenever an enterprise first goes public. An IPO can help ensure a continuous flow of liquidities, which, if rates are favorable, is subsequently used to further finance growth.


how to prepare for an IPO

However, this is easier said than done, which is why we compiled this article. Preparing sure is important, but so is understanding the whole process.


Why do companies go public through initial public offerings?


As briefly hinted at in the introductory paragraphs, the main goal for any enterprise is to expand, of course, to secure its survival through long-term sustainability. Therefore, a company whose business model is heavily reliant on artificial loans ultimately ends up being bogged down.


Here is why going public is essential. Not only does being listed lead to increased credibility and exposure for a company, but succeeding in turning hundreds, if not thousands, of investors' heads is, in parallel, a secure means of gaining access to regular cash flow. That, in turn, can help cover both a company's operational costs and future development plans, such as growing internationally with the opening of branch offices, for example.


why company does IPO

How do you make an IPO (Initial Public Offering)?


While innovation is primordial, businesses looking to go public and grow cannot rely on that element alone, unfortunately. The submission of fully transparent audited financial statements or the minimum allotment of share capital, etc., are among the range of strict regulations to be complied with.


Markets do not all lay down their rules and regulations similarly, however. The London Stock Exchange (LSE), to name perhaps the most popular, has its own set of rules. To better harmonize trading as a whole, in the United Kingdom, the Financial Conduct Authority (FCA) is the body in charge of enforcing said set of rules - principally contained in the Financial Services and Markets Act 2000 (FSMA) - and regulating the issuance of IPO authorizations.


Once clearance is given, it is usually up to sponsors (bookrunners) to take over and supervise the whole initial public offering process. Until the newly added company is listed, a company can choose whether said lead manager goes about introducing it through either the fixed price or the book-building method.


5 steps to going public


The very first step to take before hoping to make an IPO is to sketch out the most suited plan of action, that is, determining whether to first sell shares or aim for an increase in share capital instead.


. The second step: pinpointing the most favorable market


As we have already seen previously, both processes and regulations vary from a market to the next. Logically, the more regulated the market, the sturdier the company will have to be to hope to break through it. Needless to say, proper acquaintance with the markets and a realistic grasp of the financial status of the company had better coincide!


stock market

. The third step: picking the right financial intermediary


It is not up to a company to neither undertake its introduction onto the market nor set ongoing quoted share prices. The task is left to Financial Conduct Authority-approved listing sponsors: investment service providers, who we have already presented in this article.


More specifically, these accredited sponsors are responsible for offering shares for sale, reviewing contracts alongside regulation-specialized lawyers, hiring accounting professionals to handle auditing-related issues, and so forth.


. The fourth step: choosing the best-suited IPO method


For summary purposes, there are two main paths to going about making an initial public offering, namely:

  • The fixed price method, following which a company, backed by the lead managers of its choice, "fix" a price upon introducing the offer to the market.

and:

  • The book-building method, which indexes the price in line with previously-compiled data identifying an underlining trend in investor demand.

Let us take a quick yet more comprehensive look at the differences opposing the two methods:


With the fixed price method, hand in hand with the advising sponsor, the company agrees to set a non-revisable introductory price. Agreed on before the opening of the desired market session, this proposed price is to prevail for as long as the demand meets the offer.


On the other hand, the book-building method acts as a foresight exercise aiming at discovering the most accurate price. While the IPO phase is running, interested investors are welcome to place bids, either superior or equal to the floor price. By the time the bidding period is over, various amounts will have tilted the playing field, and demand will have naturally set the bar for what the issue price will be.


stock market figures and magnifying glass

. The fifth and final step: getting the approval of the Financial Conduct Authority


Not only does the company need the approval of the targeted stock exchange market to make an initial public offering, but all of the above steps could easily fall apart if the application were to be turned down by the FCA.


How much does it cost to make an IPO?


This will surely not help you keep your hopes up, but perhaps the most discouraging downside of all is the high cost incurred by getting listed and having everything sorted. Again, fees vary, substantially sometimes depending on the following criteria:

  • The market into which the company wishes to trade.

  • The nature of the transaction on the said stock exchange market.

  • The number of mediators overseeing the IPO.

Additional fees best being taken into account


Other than the remuneration of all the above go-betweens, supplementary costs are to be covered, mainly:

  • The periodic fees associated with FCA subscription.

  • The underwriting fee, which serves as compensation for the risks that a public offering entails.

  • Legal paperwork, such as contract revision, status change (if need be), legal audits, and so forth.

  • Extra expenditures concerning financial disclosure and transparency.


money bag with the word Fees and up arrow

This article has come to an end. We do hope to have answered or at least shone some light on IPO-related questions you might have had. If so, do consider taking a look at our list of other small business grant solutions or our article on how the self-employed can get government grants.


We, at Funding Routes, are committed to presenting you with the most affordable brokers and service providers for all your funding needs. Feel free to get in contact with one of our advisors!

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