Manila, Philippines

IPO Basics: Read Before You Buy

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What’s up with initial public offerings, or in market lingo IPO? How do they behave in the next few days or weeks of listing? Like the rest of the market, we cannot accurately predict its next price movements, but unlike the older listed stocks, I’d say that IPOs are far more harder to predict. Older listed stocks already have established trends and market valuation whereas IPOs are technically new kids on the block, trying to make its name and establish its valuation in the eyes of the market.

By technical definition, an IPO is the first sale of stock by a private company to the public. This happens when a privately owned company goes public and gets listed in the local stock market. Companies use IPO to generate capital and cash without the need to lend from banks or issue bonds. Personally though, I define IPO as indeterminate price oscillation. I find IPOs very tempting, and yet very scary. The initial price movements, in my opinion, is very much driven by emotions. So in the end, I’m likely to stay away from IPOs during the first few weeks. How about you?

The thought of a new stock (especially if the company is fundamentally sound) is very attractive. Remember when new classmates or new employees usually get much attention from the older guys? Imagine, for example Coca Cola listing on PSE (I wish!). The thought of finally owning a piece of that softdrinks giant. Isn’t it very luring? But here’s the catch: for sure only a few investors have an idea of how much the company for listing is valued since its financials are not regularly circulated in the public anyway. But once it decides to list in PSE, then it is required to share a copy of its AFS regularly, for the reference of the investing public.

Prior to IPO, the listing company will have a prospectus where details of the IPO, as well as the copy of the AFS is provided. This is so that the investing public is guided as to how much the company and the stock should be valued. But as to how many people spend time to read the prospectus, is a different issue. Upon IPO, listing company, together with its partner investment banks, gets to decide how much the starting share price should be. As to how much the market prices it eventually will, again, be another story.

We should note that IPOs are usually done when market conditions are healthy, generally bullish. Of course listing companies would not want to join the local market when stocks are on a downward trend, otherwise their initially offered stocks might just join the free fall. Having said that, when the market is generally bullish, it is also the time when stock prices usually deviate on the upside from the company fundamentals. Now, if you’ve seen old listed stocks, with company AFS readily and regularly available, but still with insane stock prices, what more an IPO whom you just met weeks ago via the prospectus.


Plus, companies joining the stock markets are actually selling part of the company to the public. As such, you can expect rosy pictures and good publicity all over prior to listing. As an objective trader, you need to be careful and balance out all the positive publicity with the negative ones. Of course, no company is perfect so make sure you hear both sides of the company.

Lastly, there is a lock-in period where insiders are not allowed to sell their shares x months after the listing. This is to ensure that company did not enlist itself just to be bailed out by the public. Note that of all the investors our there, insiders are usually the ones with the greatest information. And if insiders are selling their shares, that can be a red flag for the company stock prices. Now the next question is, if insiders are not allowed to sell, who then sells at lower prices during IPOs? Those who bought at high levels? If they sell at a loss at IPO Day 1, why the urgency?

Like all stock market movements, there are no hard and fast rules when projecting how an initially offered stock will perform in its early stages. If the company is really financially sound, and if you are a long-term investor anyway, then these short-term price fluctuations should not bother you much. But if you are a day trader expecting to get in while the stock skyrockets upwards, and expecting to get out via eject button before the prices go falling down, then you should be ready for a wild ride in the short-term.

But if you are either of the two and just want to be plain prudent and careful, I personally suggest that you read the prospectus, and stay away from the IPOs in its early days / weeks. Wait for the dust and all the market attention to settle down, then that’s when you time your entry.

In another post, I will look at how some recent and select IPOs in PSE fared during its early days / weeks as a listed company.

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