This is an audio transcript of Money Clinic podcast episode: ‘The Five-Minute Investor from Money Clinic — What’s an IPO?’
Claer Barrett
Can you speak the language of money or are you one acronym short of an investment picnic?
[MUSIC PLAYING]
Too often financial jargon prevents us from making the most of our money. But this podcast from the Financial Times is designed to make you smarter and hopefully richer in just five minutes.
Welcome to the Five-Minute Investor from Money Clinic. I’m Claer Barrett, the FT’s consumer editor, and I’ll be teaching you what you need to know about key investment terms in the time it takes to eat a family size box of Maltesers. Each week we take one investment term selected by our listeners, and challenge a top investment commentator to defang the financial jargon in, guess what? Just five minutes. So joining me this week in the studio all the way from New York is Rob Armstrong, author of the FT’s Unhedged newsletter and co-host of the Unhedged podcast. Welcome, Rob.
Rob Armstong
Hi Claer, it’s great to be here.
Claer Barrett
So to start off with, Rob, what does IPO actually stand for?
Rob Armstong
Initial public offering.
Claer Barrett
Could you give us your five-second definition, please?
Rob Armstong
Simply, the first time that a company offers its shares on the public markets.
[TIMER CLICKS]
Claer Barrett
OK. Well, as I set the timer, Rob, could you tell us a bit more about IPOs — initial public offerings — starting now.
[TIMER STARTS TICKING]
Rob Armstong
Claer, imagine yourself as an entrepreneur who has worked hard in starting a family widget business in your garage.
Claer Barrett
That’s not hard to do.
Rob Armstong
And at some point when you are selling zillions of widgets, you thought it might be good to share with your family. So you drew up some papers and split the ownership between yourself and your two kids. At that point, each of you owns a third of the business. Well, all a share is is one of those fractions. It could be worth a third of the business. It could be worth one millionth of the business. It’s much closer to the latter in the case of a public offering. A share is nothing else but a fractional ownership in a business or enterprise. And at some point when you are selling zillions of widgets . . . (Laughter) And after years of hard work, you’ve built yourself a very large business, and you would like to realise some of the fruits of your hard work by selling your company in whole, in part to public investors.
Claer Barrett
People like you and me.
Rob Armstong
Maybe you and me. So, Claer, you jump on your phone and you call your friend — everyone’s friend — the investment banker. Then you negotiate with the investment banker, you show him your accounts, and he or she says, we will get your company sold at, say, $20 a share. The investment banker then turns around and goes to a bunch of brokers, Wall Street or the city or somewhere else. They agree to take the shares from the investment bank at $20 a share and distribute them to the great unwashed masses. And that sale and distribution is the IPO.
Claer Barrett
If you own the shares and you’re entitled to exciting things like dividends or being able to buy and sell the investment, but give us some recent examples of IPOs that have happened that the FT’s written about.
Rob Armstong
The most famous recent one in the United States was Reddit, the social media company. And it came on to the market and at, I think, $36, and it immediately popped to $65. On the day one, IPO pop is an important thing for the finance industry because it sort of means everyone gets paid. Those broker dealers who took the shares off the hands of the investment banker, they make a little profit on their trade. And because the stock is moving upward on its debut, everyone has very positive feelings, rightly or wrongly, about the future of the company.
[TIMER TICKING]
Claer Barrett
Are there many IPOs in the pipeline at the moment?
Rob Armstong
Not as many as in the great boom years for stock markets in the US or the UK. Does the UK have boom years in its stock market? I’m not quite sure.
Claer Barrett
Are you being sarcastic?
Rob Armstong
But if they did, they would have a lot of IPOs. There’s relatively fewer, but there is one very important one coming later in 2024, we are told, which is the shares of Kim Kardashian’s shapewear company, coming to market. You, of course, know this as Skims.
Claer Barrett
Wow.
Rob Armstong
I’m not gonna tell you if I’m wearing Skims right now, but in any case, there will be an IPO later this year if the reports are true.
[TIMER TICKING]
Claer Barrett
Well, Kim Kardashian aside, is it a good idea, Rob, for investors to buy into IPOs?
Rob Armstong
That depends a lot on your appetite for volatility. I mentioned Reddit earlier and I said that had a wonderful first-day IPO pop, but it immediately fell again, going from 65 to 46. And it has bounced around in the 40s since then. You know this is what we call in the industry price discovery. Until shares get on the open market, we don’t really know what they’re worth. And it can be an awfully bumpy, bumpy ride while stock markets figure that out. So if you’re going to leap into an IPO, you better have your seatbelt tightly buckled and you better be prepared to lose a little money if things don’t go as you’d hoped.
[TIMER STOPS AND ALARM SETS OFF]
Claer Barrett
Well, Rob, the sound of that timer means that your five minutes is up.
Rob Armstong
It’s been great fun.
Claer Barrett
Well, thank you for explaining the exciting, if volatile world of IPOs to our listeners with no deviation, repetition or hesitation. If you want to hear more from Rob, then do subscribe to the FT’s Unhedged podcast. We firmly believe on Money Clinic that there are no stupid questions about money. The only stupid thing would be not to ask one if there’s something that you don’t understand. So if there’s an investment term, piece of jargon or phrase you’ve heard that’s baffling you and you’d like me to unpack it in the studio with an expert then get in touch with us. Our email address is money@ft.com. Or you can find me on Instagram and TikTok. I’m @ClaerB.
Brand new Money Clinic episodes will be coming soon. And if you can’t wait until then, then have a browse through our back catalogue where you can find hundreds of episodes. Or click on my suggestions in today’s show notes.
Finally, the Five-Minute Investor is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you will need to find an independent financial advisor. Tune in next week for another Five-Minute Investor. Goodbye.
