What should we do with money that’s sitting in the bank earning almost nothing? Buy bonds? The coupons are very low and when interest rates are heading higher, bond prices drop. Buy stocks? The stock market could be volatile moving into the Year of the Ox. Pop an IPO? Yes.
Applying for a red-hot IPO (Initial Public Offering) and selling the shares on its first day of listing is a quick and easy way to make some money at low risk. Many Hong Kong investors are already doing so, making hundreds to tens of thousands of dollars each time. In the biggest ever but aborted IPO in 2020, Ant Group attracted more than a million applicants. The top eight performing IPOs last year made investors between HK$8,000 and HK$18,000 richer, and that was when they were allotted only the minimum number of shares. Those who were allotted multiples of the minimum shares were literally laughing all the way to the bank.
In extreme cases, the so-called ‘IPO pop’ on the first day of trading can more than double your money. Eleven out of 145 IPOs did just that last year.
What is an IPO?
When business owners want to raise money to expand, one way to do so is to sell the company to the public through an IPO. It is a process that takes a company out of private hands and into the hands of public shareholders. There are over a hundred IPOs in Hong Kong each year. Some rise above the IPO prices, some sink below. To be safe and efficient, you should only go for large, reputable companies that will almost certainly give you quick and healthy profits on the first day.
There are probably around 10 such IPOs each year. JD Health, Blue Moon Group and NongFu Spring are great examples from 2020. It’s not difficult to identify the good bets, they are splashed all over the internet, on TV and in press – you don’t need to read the Financial Times or watch CNBC to notice them. The demand for these IPOs is always much more than the supply. The hottest IPOs in Hong Kong are hundreds or even thousands of times oversubscribed. This is the reason you almost certainly sell at a profit on the first day. On the flip side, your chance of getting shares can be as low as a few percent.
How can you increase your chance of being allotted shares? In this world where the divide between rich and poor is widening, the IPO market, unfortunately, favours the rich. The more shares you can afford to apply for, the more likely you’ll get the minimum number of shares, and possibly more. As a result, many experienced investors go so far as to take out IPO financing (loans from banks and brokers specifically for IPO applications) to multiply their returns. Those who borrowed for the top performing IPOs last year made multiples of HK$18,000. Banks like HSBC can offer interest rates lower than 1% and most brokers offer about 3%, and you’ll be asked if you want to take up financing during the application process.
Alternatively, you can double, triple, or quadruple your chance of getting shares in a simple way, that does not favour the rich – get your family members to open a brokerage account.
The application process
IPO financing is not as risky as you might think. The fact that banks and brokers are willing to lend investors up to 90% at low interest rates without collateral, shows that they consider it low risk. Why? Because hot IPOs are always many times oversubscribed and investors are only allotted a small fraction of what they apply for. When the number of shares is small, so are the risks.
An IPOs’ performance is correlated to the general stock market. When the stock market is rising, IPOs tend to do well. You need to be alert and participate less or not at all when the stock market sentiment
Transforming a privately held company into a public company takes months. But there are only two things you need to know – when the application period is and when the listing day is. This information is readily available on social media through websites like aastocks.com.
Though participating in hot IPOs is low risk (not all IPOs are low risk), you’ll want to play it extra safe by applying on the last day of the application period (which usually lasts four days). This is prudent just in case the stock market crashes before you apply. Most importantly, by choosing to delay you get a very crucial piece of information – the oversubscription rate during the first few days of the application period. If the number is low, you might want to reconsider your application. Once you have applied, you can’t do much about the risk of waiting a week until the listing day.
During the depths of the bear market in March and April last year, there were 23 IPOs. Out of the 12 ‘winners,’ amazingly, three more than doubled their IPO prices, while the worst among the 11 ‘losers’ sank by 50%.
It takes just minutes to apply for an IPO online through your bank (you must have a brokerage account with them) or broker. You will be notified the day before the listing on how many shares you are allotted, if any.
It also takes just minutes to key in your sell order on the listing day (which is about a week after the end of application period). Prices are very volatile and impossible to predict so, if you are happy to make any money, you will sell at open and kickback for the rest of the day. If you enjoy the thrill of watching stock prices go up and down, you’ll likely choose to sell later in the day when you feel the price is right.
It is entirely your prerogative to hold on to your shares as longterm investments. However, there’s no evidence to show that this is a good strategy. While there are some companies, like Facebook and Google, that have made their IPO investors rich, many more companies fail to do – they sink below the IPO prices, with some even going bankrupt.
Long-term investor Warren Buffett famously shunned IPOs throughout his career until last year when he participated in Snowflake’s IPO. (Snowflake made history. The largest software company ever to IPO in the US, it became the largest company ever to double in value on its opening day, reaching a market cap of close to US$75 billion.)
DB resident Boon Tiong Tan (CFA) has worked as a trader with banks like HSBC and Morgan Stanley for over 20 years. The author of A Stock Investment Book For The 99%: By A 99%, BT’s aim is to educate regular folk about the stock market and how to invest successfully. His book is available at Bookazine, Amazon and Book Depository; for information about the finance courses he offers in DB, email [email protected].
All banks and brokers charge a processing fee, generally HK$100, regardless of the outcome of the application. Other fees total slightly more than 1% of any successful allocation of shares. Those who use IPO financing obviously need to pay the interest on the loan. The interest amount for a HK$1 million loan at 1% for seven days is HK$192. For long-suffering savers, this is an opportunity to turn the tables around on low interest rates. We should take advantage of the fact that Hong Kong is the biggest IPO market in the world (alongside New York). When times are good, IPOs provide one of the best risk/ reward options in stock investing. Isn’t it time to make your idle money work hard for you?
How it’s done
Photos courtesy of stock.adobe.com
Tags: financial, Financial advice, Insider, investment, stocks