You should always look for new opportunities to grow your portfolio as an investor. One way to do this is to invest in initial public offerings (IPOs). IPOs offer a chance to get in on the ground floor of a company and potentially reap huge rewards if the company is successful. Click here to learn more.
However, before investing in an IPO, it is essential to do your due diligence and evaluate the risks and rewards involved. It is especially true for IPOs in China, which can be more volatile and risky than in other markets.
Review the company’s financials
When evaluating an IPO, you should start by reviewing the company’s financials, which will give you a good review of its overall health and profitability. Specifically, you should look at the company’s balance sheet, income, and cash flow statement. You can find these financial statements (in the US) in the company’s filings with the Securities and Exchange Commission (SEC). The filings are available on the SEC website or the company’s website. Most markets have equivalent filing requirements. Remember non-public companies have less onerous reporting requirements.
Consider the industry
It is also essential to consider the industry in which the company operates. Some industries are more volatile and might be riskier to invest in. For example, companies in the biotech industry may be riskier than those in the consumer goods industry. Before investing in an IPO, you should research the industry and understand the risks. You can find industry information on websites like Yahoo Finance and Hoovers.
Analyze the management team
Another critical factor to consider is the management team. The management team will run the company after it goes public. Therefore, it is vital to analyze their experience and track record.
The company’s filings with the SEC can find information about the management team. It would be best also to research any articles or news stories about the team.
Review the underwriters
Another factor to consider when evaluating an IPO is the underwriters. Underwriters are investment banks that help a company go public, and they are responsible for helping to set the price of the IPO and getting the word out about the offering.
It is essential to review the underwriters because they can significantly impact the success of an IPO. After all, if the underwriters cannot generate enough interest in the offering, it may not be successful, or poor advice might lead to an unrealistic launch price. You can find information about the underwriters in the company’s filings with the SEC.
Consider the risks
Finally, it would be best to consider the risks when evaluating an IPO. Every investment carries some risk, and IPOs are no different. There are several risks to consider, including:
- The company may not be profitable
- The industry may be volatile
- The management team may be inexperienced
- The underwriters may not be able to generate enough interest
How to invest in IPOs
Select a company
Before investing in an IPO, you need to select a company. The numerous ways you can do this are:
- Reviewing the filings of companies that have recently filed for an IPO
- Researching companies that are expected to go public soon
- Speaking with your broker or financial advisor
Open a brokerage account
Once you have selected a company, you will need to open a brokerage account, where you will hold your company shares. You can open an account with any online broker, and you’ll also need to fund your account. The minimum requirement is usually HK$500.
Place your order
When the IPO goes live, you will need to place your order. You can do this through your broker’s website or mobile app. You must stipulate how many shares you want to purchase and what price. It is important to note that you may not get all the shares you want because there is often more demand for IPOs than shares available.
Wait for the stock to be allocated
Once you place your order, you must wait for the stock to be allocated. Allocation happens after the IPO has closed and is when the underwriters determine how many shares each investor will receive. You should receive an allocation notification from your broker within a few days of the IPO closing.