Investing in IPO for Beginners – What, Why and How
IPO stands for Initial Public Offering, a process of offering shares of a private corporation to the public as a new stock listing.
Just last week, Kepwealth Property Philippines, Inc. or KPPI IPO went public and it caused so much noise from the investing public. From an initial public offering of Php 5.47 it closed at Php 8.15 a share on its first trading day on the Philippine Stock Exchange.
The stock reached an all-time high of Php 27.35 with its most recent close last August 23, of Php 18.31.
In this post I will try to share everything you need to know about IPO. I will touch on the following topics:
- What is an IPO
- How IPOs work
- Advantages and Disadvantages of Investing in IPOs
- Tips when investing in IPO
- Previous IPO case studies
What is an IPO?
IPO or Initial Public Offering refers to the process of offering shares of a private corporation to the public in a new stock issuance.
Every stock you can see in the Philippine Stock Exchange (PSE) had once been in an IPO stage.
Prior to being an IPO, companies are considered privates. Counted as their shareholders are only those early investors such as founders, venture capitalists, angel investors, families, and friends.
Once they are in the IPO stage, they are now known as “publicly-listed companies.”
The public (YOU and ME) can now invest in the company and own shares with the company even for the small amount of money we have.
What does it mean when companies go public?
A company will need money to support and maintain its overall operation. Thus, it may opt to open its company to the public.
Other reasons for going public are as follows:
1. Raising capital for expansion;
2. Pay off existing debts;
3. Fund research or developments;
4. Build up credibility as a publicly-listed company
How IPOs work?
Now, how does IPOs work?
The IPO process can be summed up into five steps.
Step 1. The company will select an investment bank to handle the IPO.
The investment bank will also work as an underwriter for the initial public offering.
It is the duty of the underwriter to provide value to the company by making a large purchase and facilitating in the going public stage of the initial stock.
Also the underwriter takes the biggest risk when it comes to selling the stock. You want to make more than what you paid for the stock.
First Metro Investment Corporation (FMIC) for example was the underwriter of Wilcon when it went public in 2017.
Step 2. Next step will be the due diligence and regulatory filing needed to make the IPO launch.
This may be the longest part of the process.
There are several needed such as Security and Exchange Commission (SEC) approval that needs to happen before the IPO launch.
This is also the stage wherein the underwriter and the company sits down to come up with an initial prospectus and private filings.
It is also during this stage that underwriters go on road shows to market the shares to institutional investors and evaluate the demand for the shares. Step
Step 3. Upon approval by the SEC, the effective date and offer price of the IPO are now decided.
It's good to note that IPOs are often underpriced. This is done to ensure that the stock will be fully subscribed or even oversubscribed by the public investors.
Advantages of investing in IPOs
Investing at the early stage
Probably the best benefit of IPOs for investors is the fact that you are investing in the early stages of the company. Most IPO companies are relatively new and less-known which means more potential for growth.
As a shareholder, it means you earn better returns as well in case the company soar high.
Perfect for long-term investors
Because IPOs are mostly underpriced, investing in them for the long-term can be really beneficial.
In the long run if the company makes huge progress, the dividends earned by the early investors will be higher.
Once the company goes public, all the fine print including financials, are shared with the public. This means you get to see and have access to information about the company. You also get to attend stockholders meeting and have voting rights as a shareholder.
Disadvantages of investing in IPOs
Difficult to predict
Because it is a new stock, there is little to know knowledge whether the stock can really flourish in the market. There are no precedent for IPOs so it will be very difficult to predict whether you can make money out of the stock.
Market timing is also something to consider when it comes to the success of an IPO. If the overall market is not on the good side, the stock’s growth may slow down.
Should you invest in IPOs?
Let’s face it. IPOs offer some of the biggest opportunities to create wealth. However, risks are inevitable when it comes to any investment.
If you are thinking of investing in IPOs, please do consider the following:
Your risk factor.
Investing in IPOs have ultimately higher risk involved than investing in a seasoned stock a seasoned stock available in the market. The IPO may have a potential for growth, but there is no guarantee of future success.
You can always assess your risk factor by asking the following questions:
- What is your age?
- How long are you willing to be invested?
- What is/are your goal?
Always assess your financial situation, any present (or future) liabilities you need to factor and other concerns.
I learned this rule of thumb when it comes to asset allocation.
Simply subtract your age to 100. The number of you get should be the percentage of your investments in equity. Keep your investment in IPOs within this said limit.
Your available money.
Once the IPO release its offer period, you will have an idea how much per share will be and the minimum number of shares you can own. It is good to examine your finances and see whether you can really accommodate the IPO or not.
No matter how much you want to invest in IPOs, if it would mean getting getting out of your budget or being trapped in debt, it's a pass in my opinion.
The best investment you can make is to stay debt-free and ahead of your finances.
How much do you know about the company? Have you read the prospectus? Where will the money from the investing public be used? It is important to have proper research before you invest.
You also should read the prospectus for the IPO before investing and find the reason why the company is raising funds. If it is for expansion or developing new products, these are good news.
If the money raised will be used to pay debt, you may want to think twice. It could be too risky in such company.
Other Tips when Investing in IPO
1. Plan it out
Offer periods are announced at least a month to the general public. This should provide you with ample time to research about the company and plan your finances for the investment.
Decide how much you can invest in the IPO and what your targets will be. If you are investing in the IPO for the short term, when do you plan to sell? When you doubled your money? When you make a profit of 50%?
Have a written down plan for the IPO investment.
2. Buy during initial offer
There’s a famous phrase that goes like this – Strike while the iron is hot.
What does it mean and how it relates when it comes to investing in IPO?
To strike while the iron is hot is to act decisively and take an opportunity when it arises.
Whenever you can, make sure you buy during the initial offer. As mentioned earlier, shares are most often than not underpriced during the initial public offering.
If you are a short-term trader, buying during the first day and if possible, first hour of the IPO is simply beneficial.
3. Always invest with money you are okay to lose
The most important rule when it comes to investing is to always invest with money you are okay to lose.
Investing is very different than saving money. When you invest, you are putting your money at risk in search for a better potential return than the average savings account of 0.25%.
Warren Buffet, known as the greatest investor, never invests in IPOs. In an interview, he even warned investors not to buy new offerings during hot periods in the market. Buffett explained, it’s better to be safe than sorry when investing in untested companies.
“You can go around making dumb bets and win. … It’s not something you want to take as a lifetime policy, though.”
Read more about the article in this link.
The point is, the world of IPOs can be really exciting. But, make sure you have a buffer fund ready. There are always risks when it comes to any investment. If you make poor choices, you could lose everything without a safety net prepared.
Previous IPO case studies in the Philippines
Now I’ll share some of IPOs that hit the Philippine market and what happened to them through the years. I am hoping these IPO stories can give you insights as you invest in the upcoming IPO in the Philippines for 2019.
Double Dragon (DD)
Double Dragon is a property firm owned by Jollibee Foods Corporation (JFC) Chairman Tony Tan Caktiong and business partner Edgar “Injap” Sia II, founder of Mang Inasal. It was the first IPO in 2014 and provided a 375% gain for shareholders in just 1 month!
DD started an IPO of Php 2 per share and it boomed to up to Php 80 per share. Currently, the stock price is at Php 23 level which is still high if you were able to invest during the IPO.
Wilcon Depot is a home improvement and construction supplies retailer. It went public in 2017 for only Php 5.05 per share.
Right now it is trading for Php 16 per share.
Wilcon is a good example of an IPO that has consistently provided returns for its investors. It may not be as fast and drastic as Double Dragon, but Wilcon still manage to make a consistent share price appreciation even with the volatile market.
Cemex Holdings Philippines (CHP)
In 2016, Cemex Holdings went IPO for Php 10.75 per share.
Cemex is one of the leading cement players in the country and it's IPO stage was well-received by the investing public. However, it wasn’t able to catch up on its IPO price ever since.
Right now it is trading for Php 2 only.
What happened to Cemex Holdings Philippines? One reason why Cemex plummeted was because its reason for going public was to basically, pay debt. According to the prospectus, no part of the proceeds will be used for expansion, whether to acquire other businesses or buy assets.
As to whether Cemex can recover or it will go lower, only time can tell.
Upcoming IPOs in the Philippines for 2019
Now we’ll dive into the upcoming IPOs in the Philippines. There are three IPOs that are said to go public this 2019 with two already approved by SEC.
Axelum is a coconut products manufacturer. They are the major supplier of Vita Coco, a well-known coconut water and related product company.
Offer Period – September 24 to September 30, 2019 Offer Price – Php 6.81 per share
AllHome Corporation is the homeware store chain of Manny Villar, the country’s richest man based on Forbes’ 2019 list.
Offer Period – September 30 to October 4, 2019
Offer Price – Php 11 – 14 per share
Fruitas is in the food and beverage industry which commonly seen in malls and other key locations. Fruitas has over 20 brands in its portfolio including Buko Loco, Juice Avenue, Buko ni Fruitas, Johnn Lemon, Jamaican Pattie Shop, etc.
Offer Period – November 18 to 22, 2019
Offer Price – Php 1.99 per share
Final Notes from SavingsPinay
As you may remember, I sold all of my individual stocks before 2018 ends. The reason for this is I transitioned to a lazy portfolio, investing heavily on Index Funds such as First Metro Exchange-Traded Fund and First Metro Consumer Fund.
But, I also said how I’m not closing my doors to directly buying stocks in the future.
And so, with much excitement in my heart, I decided I will invest at least 10% of my portfolio on IPOs this year. No more, no less.
I just want to play my money for a short-while and see how much I can generate.
For the long-term, I am still holding heavily on my mutual funds.
Should you invest in IPOs, my tip is to really study it well. Make sure you are 100% committed. Kailangan mo tutukan yan, especially in the first few days of its release. If you are easily swayed by your emotions, I suggest to stay away from IPOs and consider blue chips stocks instead.
If you are thinking of investing in IPOs, please do consider the following:
Your risk factor.
Your available money.
Izza of SavingsPinay helps Filipinos bridge the financial literacy gap one content at a time by providing insights and tips on budgeting, saving, investing, side hustle and growing your net worth. Aside from this blog she also writes at www.izzaglinofull.com, a beauty and lifestyle blog for frugal Pinays and manages, www.izzagevents.com, a wedding and event business since 2011. For inquiries, topic suggestions or future collaborations email her at email@example.com