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Pre-IPO – How can you get involved?

Grey market

A grey market is an instrument for speculating on the market capitalisation (no. of shares x price) of a company on the close of its first day of conditional trading. Pricing is unofficial and allows speculation on the success of a company’s IPO debut whilst giving an ‘idea’ of demand for the shares.

Ahead of an IPO (sometimes well in advance) traders bet long or short whether they think the shares will close higher or lower than the official IPO price. The price rises or falls according to the volume and size of any bets placed. The grey market closes, and all bets are settled at the end of the first day of trading.

Conditional Trading

Conditional trading takes place for a few days between the official IPO and full LSE listing. Shares can be bought during this period and, despite common misconception, held indefinitely thanks to trading moving seamlessly from conditional to full trading. Shares are bought and sold in the normal manner but trading tends to be limited to big investors (i.e. pension funds, hedge funds).

HOWEVER, because conditional trading involves the underlying shares CFD traders can still benefit from being able to participate. A deposit of just 5-25% of the trade value allows the trader to benefit from any potential gains (or losses) being magnified via the leverage (4x to 20x) involved.

Note that if for any reason an IPO should be cancelled during the ‘conditional trading’ period (share price collapses, LSE refuses) any trades placed during the period would be null and void (all profits, losses and trading costs) and reversed from clients’ accounts. The chance is, however, very unlikely these days with most IPOs fully underwritten meaning the investment banks take on the risk.

For a look at the performance of some of the best known IPOs since 2013 read on.

UK IPOs 2012-2015 and Conditional Trading activity

On the next page is a list of the 40 biggest IPOs since 2012 and how they fared when shares were first traded including their trading ranges during the conditional trading period. In most cases there is an average range of 8.1% which, when using CFDs, offers significant trading opportunities versus physical shares thanks to the leverage involved and the average 4.2% gain from open to high is not to be sneezed at.

So even if you don’t get on-board at the official IPO price in order to benefit from the ‘pop’ on day 1 (like AO World’s +40.6%, Royal Mail’s +36.4%, Foxtons’ +19.3% or Poundland’s +18.3%; average of +6.0% from 40 major IPOs since 2012) there are still options available to you in terms of trading during the conditional period and before the seamless move into full trading.

Furthermore, following the official IPO sale of shares to investors and before conditional trading begins, Accendo can help mitigate some of the risk involved by giving you an idea of the IPO’s success together with indications as to where the shares will start trading (above or below the IPO price?) helping you to decide whether or you want to participate.

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

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