What is an IPO?

Key Points

• IPO refers to a company's first time selling its shares to the public.

• For companies, IPO can raise funds and enhance brand image.

• High costs are incurred during the IPO process.

• Investors participating in IPO can obtain arbitrage opportunities, but also face the risk of loss.

Concept Explanation

IPO is the abbreviation for Initial Public Offering, which is the way a company raises funds by selling its shares to the public for the first time through an exchange. The process of investors subscribing to IPO company shares is called new share issuance.

IPO is a very important milestone in the development of most companies, indicating that the company has achieved a stage of development and gained public recognition. The company will also be transformed from a private company to a public listed company, and its stocks can be freely traded on the exchange. At the same time, as a public company after listing, the company needs to regularly disclose financial reports and significant operational information, and accept supervision from the public and regulatory institutions.

Advantages of IPO for the company.

1. Raise funds needed for business development.

2. Increase exposure and enhance brand influence.

3. It is beneficial to attract and motivate core talents through stock-based incentives.

4. Early investors in the company can have a benign exit through public trading markets.

Disadvantages of IPO for the company.

1. The IPO process can incur high costs.

2. To maintain short-term stock prices, it may affect long-term development strategies.

3. Stock ownership dispersion may lead to the majority shareholder losing control of the company.

Investors participate in IPO for profits.

In order to go public smoothly, most companies are willing to issue shares at a discount, providing arbitrage opportunities for subscribing to new shares.

Taking Hong Kong new stock listings as an example, the average first-day increase for new stocks listed in 2020 was 18.2%; for new stocks listed in the first 10 months of 2021, the average first-day increase was 15.9%.

Risks of investors participating in IPO.

Affected by the fundamentals, valuation of IPO companies, and market sentiment during IPO, there is a possibility for investors participating in subscribing to new shares to face a decline in stock prices, thus resulting in potential losses.

Taking Hong Kong new stock listings as an example, the first-day decline rate for new stocks listed in 2020 was 33.3%. For new stocks listed in the first 10 months of 2021, the first-day decline rate was 38.0%.