Are initial public offerings (IPOs) a good way to start investing in the stock market? Is it better to subscribe to an IPO or just buy stocks when they get listed in the market? These are just some specific questions I have been getting lately.
Before getting ahead of ourselves and delving into the specifics of IPOs, it is important that we first start off with the basics: What is an IPO and what is its relevance to the company seeking it and to the general investing public?
According to Investopedia, “An initial public offering refers to the process of offering shares of a private corporation to the public in a new stock issuance.” Having an IPO means that a company is transforming from a private company to a public company.
This move will allow the company to sell its shares to the public and raise capital from the public while giving its owners the chance to maximize market value of their investments. With this additional capital for the company from the general investing public, the company is empowered to expand and grow their business.
The Philippine Stock Exchange (PSE) is where the companies going public in an IPO gets listed. The PSE usually targets around eight IPO’s per year. This year, we may have a total of six IPOs. This is a lot better than the previous years.
This year, the perception on the market is slightly better with several investment houses giving higher targets for the market in terms of value and volume. The consensus for the market (PSEi) is a year-end target of 8,500.
This target is based on the continuous slowdown of inflation (2 to 4 percent range) from 5.2 percent last year, loser fiscal and monetary policies that encourage aggregate spending, and the strengthening of the peso against the dollar, which bodes well not only for the market in general, but also for IPOs.
If the local market is deemed strong, more companies will be enticed to go public and more investors will participate in the offerings. This may be the reason why despite the ongoing trade war between the United States and China, companies going public this year seem unperturbed.
As this is an exciting time for IPOs again, investors who want to participate in an IPO need to subscribe through their stockbrokers. An investor can ask his broker to list his name and number of shares he wants to buy. The investor must be committed to buy those shares once confirmed. When the brokerage house receives the confirmed allocation, the investor should pay and get ready for the listing date when he can trade his shares already in the PSE.
The Philippine Stock Exchange has launched the PSE EASy recently. This is their new online IPO subscription platform that will allow local small investors (LSI) the chance to get as much as the maximum allocation of P100,000.
The LSI program aims to allocate as much as 10 percent of the shares of each IPO to small investors. To access PSE EASy, go to (https://easy.pse.com.ph) and create an account by filling up required fields, attaching a photo and choosing a trading participant (TP). Wait for the verification link from the PSE and the approval of the chosen TP. The PSE EASy aims to make subscriptions and notifications of future offerings convenient as everything will be done online.
It is understandable that IPOs appeal to a lot of investors. There is the hope that one will be able to ride a business that can tremendously grow in value and by extension, increase its market price. This may be due to the phenomenal performance of “blockbuster” IPOs when they traded in the market.
While we have seen some IPOs give extraordinary returns to its investors, we should not discount the fact that there were IPOs that did not do well when they listed in the market.
Some have not even reached their IPO price after being listed in the exchange after a number of years.
At the end of the day, do not buy an IPO just because everyone seems to be subscribing to it. Know the company. Know the business. You will only get the conviction to buy and hold on to the stock if you know that it is a good investment.
Carissa Patag is a registered financial planner of RFP Philippines. To learn more about personal/financial planning, attend the 80th RFP program this December. To inquire, e-mail firstname.lastname@example.org or text <name><e-mail><RFP> to0917-9689774.