IPO stands for Initial Public Offering, and it is the process of a private company going public and offering shares for the first time. When a company goes public, it means they list its stock on an exchange, so that the public can participate in buying its shares.
This article will explore why companies launch IPOs and the advantages and downsides of investing in ‘fresh’ shares. It will also discuss the IPO scene in Hong Kong, and how you can get started investing in new stocks and shares in the city. If you are eager to get started, you can read on.
Why do companies launch IPOs?
Companies launch IPOs for a variety of reasons. Some may do it to raise capital, as the public can begin buying their shares. They may also do it to gain publicity to make it easier to work with future business partners, as there is a high threshold and criteria for launching an IPO. In other words, it is a way to signal to the broader business world that they have reached this milestone.
Finally, companies may also launch IPOs if their founders are ready to cash in on the success of their business and move on to other ventures. This is especially true in the case of serial entrepreneurs, who they find it meaningful to establish and create ventures and have no intentions of managing a company in the long term.
How to invest in IPOs in Hong Kong
If you are a trader in Hong Kong and you are looking to invest in ‘fresh’ shares issued, there are a few things you need to know.
IPOs in Hong Kong
The first is that you are in safe and capable hands. Hong Kong has always been a cosmopolitan hub, and there is great momentum in the economy for company fundraising. There is the majority of tech companies go public in the city, for several reasons.
Firstly, the local market is supportive of technological developments, especially in the new economy. Secondly, the city’s proximity to mainland China makes it a very attractive place for international companies to raise funds. Many of these companies see Hong Kong as a gateway to the larger Chinese market. This means as an investor, you will have plenty of options to choose from when it comes to newly listed stocks.
Listing boards in Hong Kong
Next, there are two main listing boards on the Hong Kong Stock Exchange. They are the Main Listing Board and the GEM (Growth Enterprise Market). The Main Board is for more established companies with a significantly higher market cap, revenue, and annual revenue. The GEM is for small and mid-sized companies with an edibility criterion that is less stringent than the Main Board, for more up-and-coming businesses. Traders can select either one when they want to invest in a new stock.
How to look out for IPOs
The first step to investing in IPOs is to know how to look out for new companies. You can do this in a variety of ways. One of which is to check out the Hong Kong Stock Exchange’s official website, on a page called ‘Newly Listed Securities’ as a part of their routinely updated Trading News section.
There will be a list of newly listed securities that include equity, equity warrants, ETFs, leveraged products, inverse products, unit trusts, mutual funds, debt securities, SPAC shares, and SPAC warrants. The HKEX provides information on when the listing became public. For example, the stock’s name and code, the board lot, where the stock is listed (the Main Board or GEM), and more relevant details. They will also list companies that are about to go public in the next few days. So investors can be prepared and read up on them in advance.
You will also be able to find each company’s listing prospectus linked on the page, which you can peruse at your leisure ahead of each IPO.
Advantages of investing in IPOs
Maybe you are considering investing in IPOs. However, you are not sure what the upsides are, as opposed to investing in regular securities that have been on the market for a while. That makes total sense, and it is normal to have worries about something unknown. However, each year, there are many who leap at the opportunity to invest in a new share. Below are some reasons why they do it:
Getting in on the action early
The first advantage people enjoy is that they get to get in on the action early. When one invests in an IPO, one gets to profit in a short time.
Company transparency
Even though having more information does not necessarily mean having information of better quality, it can help to read through a company’s prospectus and know every detail of its financial health and management operations. This is a great advantage for investors who prefer to do ample research before investing in any stock.
Participating in a company’s history
Another advantage and reason why people may invest in IPOs is the feeling of participating in a company’s history. An IPO is an important milestone for any business. Some people like to join in on the action to commemorate the event.
Risks of investing in IPOs
However, those who are reticent about investing in IPOs also have a reason to be. There are several risks of investing in a ‘fresh’ share, and they are as follows:
Insufficient price information
The first risk of investing in an IPO is that though you may have the prospectus. You may not have sufficient information in terms of its pricing. This is because there is no price history for the stock. It is difficult to estimate whether it is over- or undervalued. If your shares are overvalued, they may plummet in price quickly, or they may not have much room for growth.
Not allotted shares
Depending on how popular an IPO is, you may also risk not being allotted a share. This happens mostly with oversubscribed IPOs, wherein many investors are interested in getting a share. There may also be a problem in which there are fewer shares issued than originally planned, which means not everybody can get their full allotment. For example, you may apply for 30 shares but only receive 10.
Highly volatile prices
Finally, a risk that comes with all forms of trading is the market risk – in that prices of shares will fluctuate and there is no such thing as guaranteed profit. However, this risk is heightened with IPOs, as the stock is in its infancy in terms of the trading stage. Investor sentiment may heavily sway the stock’s performance in the market after listing. there may be a holding period in which investors are not allowed to sell their stocks, meaning you will be ‘stuck’ with these shares.
How to get started investing in an IPO
If you are interested in getting started in investing in IPOs, one way you can do it is to create an account with a broker. There are plenty of brokers to choose from in Hong Kong, as it is a big financial hub. You can narrow down your search by checking which stocks they trade. If they allow their clients to apply for shares when companies launch IPOs. Once you find a broker, you only need to create an account, verify it, deposit funds, and you are set to go.
The bottom line
Investing in IPOs is an exciting activity, and Hong Kong is the perfect place to do it, with its energetic market and government support of new businesses and ventures. Before you invest, you should make sure you do sufficient research. This includes evaluating the company you want to invest in, current stock market conditions, sector economic health. Never invest more than you can afford to lose. You should always have an exit strategy before you purchase any shares.
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