Have you ever heard of the phrase “companies going public”? If not, then this article is written for you. If you’re looking for opportunities to trade in the stock market, look no further than the Initial Public Offering (IPO) from a company gone public.
To learn more about this, read this guide to IPO stocks and find out if it’s a good option to consider.
What is an IPO?
IPO stands for Initial Public Offering, which is also called the “stock market launch.” As what the name suggests, it refers to company stocks that are sold to the public for the first time. The supplying company is the sole seller of the stocks on an assigned IPO price.
The announcement of the price comes prior to the offer period to generate a dose of excitement and spread awareness for the grand listing date. The company will then be labeled as “publicly traded” or “publicly-listed.”
After the period of IPO, the shares sold are traded usually like other stocks wherein the sellers and buyers are from the investing public and retail investor.
Why do companies go public?
Going public is a one of the means that small companies resort to in order to generate capital. This capital can be used to spend on research and development, debt repayment, and other expenditures. It also helps in branding and reaching a wider base of potential clients and target market.
As a public relation tactic, IPO may also help in increasing their shares in the market, although that is not guaranteed. Also, publicly listed companies benefit from a stock transaction tax at a rate of 0.5% of the gross price. In the contrary, those shares not publicly traded with the Philippine Stock Exchange (PSE) is charged with rates ranging 5% to 10% of capital gains tax.
Moreover, IPO seems to make an entity look good, but it can also be an exit strategy utilized by some entrepreneurs. It helps them to break even or close down their investments on the said business.
Impact of IPO to the PSE Index
IPOs impact PSE positively. As the number of the stocks being launched in the market goes higher, it places the economy in a better position. In contrast, when the IPO issuance declines, it also signals the downturn of the economy.
To put it simply, the prices of shares reflect the status of the economy.
In 2018, the PSE index reached the 9,000 mark, the eight-record high, indicating the positive outlook of our economic state. However, the pandemic has dragged down the global market.
In April 2020, PSEi declined to a 5,300 mark. While the effort of nations to contain COVID-19 continues, the world economy has yet to rebound from this crisis. The economy has also yet to return to the double-digit listings before the 2008 recession or the golden era of IPO in the 1990s.
Methods on investing in IPO
There are two ways to do participate in a public offering: one, through an online broker; and two, through a local small investor program. Here’s how each method works.
Online brokers usually offer shares by placing them on their website, especially if you are an existing client or have a trading account on their platform.
The downside of this method is that only a limited number of shares will be sold. If the number of purchase requests are higher than the available shares that the broker is allotted to sell, the distribution takes a raffle system. This means that there is no guarantee that you will acquire one. you can’t buy if you don’t get picked.
Local Small Investors Program (LSIP)
LSIP is an initiative of PSE to convince more small investors into IPO participation. It also a method where you can directly purchase shares from banks or financial institutions that promise to acquire unsold shares in case that new set of public shares are released.
The issuing company is required to set a portion of the shares for LSIP. To reach a wider number of small investors, a minimum board lot is accepted and the maximum investment limit is ₱25,000.
Tips on buying IPO
- Make a background check on the issuing company. This includes the business model, financial history, performance in the industry, credibility of shareholders and management team.
- Assess the price of the shares. You must hypothesize the returns by checking the price-earnings ratio.
- Check the volatility, liquidity, and risk of the shares. The small percentage from the traded shares of a publicly listed company may mean higher volatility and risks.
- IPO is a good option for short-term investments.
- For long-term investments, choose a company that has over 25% free float to ensure the stability of the movement of the share price.
- Read up on IPO. Don’t engage in emotional investing.
PSEi initially plans to release six upcoming IPOs this 2020. However, due to the coronavirus pandemic, an update has yet to be released.