Hong Kong has become a popular destination for companies looking to go public through an IPO. The Hong Kong Exchange (HKEX) is one of the largest, most active, and well-known exchanges in Asia. It has a long history of attracting international investors and companies in all sectors – particularly in the tech and financial fields. The city’s high population of expats and proximity to mainland China also make it a perfect gateway to the Chinese market while still getting decent international exposure.
In this article, we will discuss why people invest in IPO shares, including some of the benefits that investors may find in these fresh stocks. We will also examine some risks of investing in IPOs and how to mitigate them. Finally, we examine how a trader can get started investing in IPO shares if they are interested in participating in this type of investment.
Why invest in IPO shares?
There are many benefits that investors of IPO shares find in doing so, compared to investing in other shares or blue-chip stocks that have been on the market for a long time. Some examples include being able to get in on the action from the ground up, lower share prices, and the potential for the stock to appreciate substantially.
Potential for high returns
The main benefit of investing in IPO shares is that there is a potential for high returns if the company performs well. This is because IPO shares are often priced lower than their market value to attract investors in the first place. When public trading commences, they will often increase in value as demand for the shares rises. However, that is not a given, and traders should still invest according to their risk appetite and investment objectives.
Early access to promising companies
Another benefit of investing in IPOs is that traders can gain early access to promising companies. This is great for traders who want to feel as though they are investing in a company and supporting them from the ground up. When IPO shares are poised for growth, investors who want to buy and hold these shares can potentially benefit substantially in the long term.
Finally, before IPO shares are made available for public purchase, there is often a roadshow that can greatly increase the public visibility of the company. This can lead to more investors being interested in their shares, which can increase the demand for them and thus lead to price appreciations in the company’s share price later.
The risks of investing in IPOs
Nevertheless, there are risks of investing in IPOs just as they are present in other forms of investments. Below are some of the risks associated with these investments and the kinds of risk management techniques traders can use to safeguard their trades.
One of the risks of investing in IPOs is its relatively high volatility compared to other instruments, such as stocks from more established companies. This volatility is especially apparent in the early days of trading, when it can be relatively difficult for investors to get an accurate grasp on price movement predictions. This can cause a risk of losses from markets behaving contrarily.
For companies that have just gone public, investors may find it hard to find information on its financial and operating history. There will also be a lack of information on how the stock has performed historically, which can give investors clues as to whether there are any seasonal trends. This can make it challenging for investors to accurately predict market movements.
Oversubscription of shares
For IPO shares, there may be the possibility of shares being oversubscribed, meaning that the demand of shares exceeds the supply. This makes it difficult for investors to obtain shares, even if they meet the minimum investment requirements. Investors may also end up being allocated fewer shares than they had subscribed to purchase, limiting their potential returns.
Risk management techniques when investing in IPO shares
One way to manage these risks that come with investing in IPO shares is to properly access your risk appetite and profile before you begin trading. Consider your investment objectives and how much money you can realistically afford to lose. You should also consider what your investment style is. This way, you can have a clear idea of what goals you are working towards and not risk more than you can afford to lose.
You should also do your due diligence and research the companies you want to invest in thoroughly. This means not only ensuring you read their prospectus, but also researching the industry landscape and the potential of the company in the short and long term. On top of that, you can see how the company is doing amongst its competitors to understand better its prospects in the market.
How to get started investing in IPO shares
If you are interested in investing in IPO shares, you can get started by taking the following steps:
- Select a broker and open an account
The first step to investing in IPO shares is to select a reputable and reliable broker that offers IPO shares and trading opportunities with competitive spreads. One good example is Saxo Hong Kong. When opening an account, select the account tier that suits you most.
- Research IPOs
Just like you would research a stock to ensure you are making the right investment decisions, you should research IPOs available. You can look through them on the broker’s website or on the HKEX website that shows upcoming IPOs with attached prospectuses, which will contain crucial financial information on the companies about to go public. You should also research sector trends and the company’s growth potential, as well as determine which options best suit your risk tolerance.
- Place an order for IPO shares
Once you have determined the kind of IPO you want to invest in, you can place an order through the trading platform provided by your broker. You can do this by specifying the number of shares you want to purchase and the price you are willing to pay for those shares.
- Wait for allocation
If you are purchasing the shares of a company that has not yet gone public, you will need to wait for the allocation of shares. IPOs may be oversubscribed, depending on the company’s popularity. In this case, you may not be able to obtain shares, even if you meet the minimum investment requirements.
- Monitor the market
Finally, when the IPO shares begin trading, you can start monitoring the market closely to see how your stocks are performing. You should be prepared for potential volatility in the early days of trading, and depending on your risk appetite, set up risk management strategies such as stop-loss orders.
If you are looking for a way to invest in a company in the early days of going public, IPO shares a great way to do that. IPO shares provide plenty of opportunities no matter which sector a trader is interested in, and there is the potential to benefit from substantial price appreciations. However, there is also the risk of high volatility in the market, and traders may find it more suitable to only invest what they can afford to lose.