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Despite the decline in stock market performance during the coronavirus pandemic, three companies got listed on the Philippine Stock Exchange (PSE) in 2020.
The first IPO of the year was that of grocery operator MerryMart Consumer Corp. The second company to file an IPO was Ayala Land REIT, the first real estate investment trust (REIT) listed in the stock market. The most recent public listing—the second largest IPO in the Philippines—was by fiber internet service provider Converge ICT.
If you missed out on the opportunity of investing in these IPOs, you can look forward to doing so in the upcoming IPOs. Among the companies expected to issue stocks for the first time in 2021 are Philippines AirAsia, Solar Philippines, and DoubleDragon’s DDMP REIT.
Buying IPO shares is one of the exciting parts of investing in the stock market. Through the shares you purchase, you become part of the growth of a newcomer in the market with so much potential to succeed.
While waiting for the next IPO, take the time to educate yourself on how an IPO works, its pros and cons, and how to invest in one. Here are the basics that first-time IPO investors need to know.
What is an IPO?
An initial public offering (IPO) is a process in which a company sells its shares of ownership to the public for the first time.
Through an IPO, a company shifts from being privately owned to publicly traded and owned by institutional and retail investors. Hence, when a company files an IPO, it is also called “going public.”
Why Do Companies Go Public?
Primarily, corporations sell stocks to generate capital for their business. But there are also many other benefits of holding an IPO.
Raise capital for business expansion
An IPO is one of the ways up-and-coming companies use other people’s money to fund their business growth.
When a small company has an IPO, it means its business has become successful enough to have high growth potential. With expansion comes the need for additional capital. And to generate capital, the company goes public so that it can reach as many investors as possible.
Funds raised through IPOs are usually spent on purchasing or upgrading equipment, research and development, diversification of products and services, and expansion into a new market or a new line of business.
For example, the Converge IPO is intended to raise capital for accelerating the telco’s fiber network rollout all over the Philippines (Currently, Converge service areas are concentrated only in Luzon).
Meanwhile, MerryMart would use the proceeds from its IPO for expanding its store network and investing in distribution centers.
Pay off company debts
Companies, especially those whose initial investment was mostly funded by a bank loan, may generate funds for debt repayments through an IPO. This helps them avoid paying interest on their loan and maximize their profits.
Provide liquidity to existing investors
An IPO significantly increases the value of the shares in a company since it’s already publicly traded. This means existing investors—such as the founders, senior management, employees, and early investors—can make a great deal of money by selling their shares.
Attract and retain top talent
Once a company starts selling shares in the stock market, it can offer stock options to its prospective or existing employees as a bonus, incentive, or standard benefit.
Owning a share of the company instills pride in being a part-owner of the organization. It also motivates employees to work harder in helping the company succeed. The more successful a company is, the more likely its shares will increase in value. This means higher profits for employees who hold stock in a company.
Have the capacity for mergers and acquisitions
This is another way an IPO helps a company achieve growth. If a corporation has publicly traded shares, it’s easier to close merger or acquisition deals.
Also, a company may offer shares as payment when acquiring another business.
Get better borrowing terms
Companies going public are required by the Securities and Exchange Commission (SEC) to be transparent. This means making their financial reports, sales figures, and other relevant data available to the public.
Such increased transparency prevents fraud and increases lenders’ and investors’ trust. As a result, it’s easier for public companies to borrow money and get more favorable credit terms compared to private companies.
Enhance public image and prestige
When a company issues stock to the public for the first time, it receives a lot of attention from not just potential investors but also the media. This helps amplify the company’s exposure and credibility, as well as the public’s awareness of the company.
Ultimately, the boost in the company’s public image can drive its sales and profits.
Benefits of IPO to Investors
Should you buy an IPO or not? Is it better than investing in regular stocks? It’s important to weigh the pros and cons of IPO investing to make a sound decision.
First, let’s talk about the advantages of investing in an IPO. Companies gain a lot from doing an IPO, and so do public investors. Here are several good reasons to buy IPO stocks.
Invest early in a fast-growing company
When you buy an IPO stock for long-term investment, you get the opportunity to increase your wealth as the company grows over time. If the company performs well, investors will benefit from its success, too.
Buying low and selling high is the biggest appeal of IPO investment. Historically, IPO shares are traded higher than their offering price upon listing. This is often the case for emerging companies with a huge potential for growth.
The value of such shares can rapidly increase in value if the company performs successfully. For IPO investors, this means maximized profits.
Achieve long-term financial goals
Some investors buy IPO shares for short-term trading. Once the share price rises sharply or when they’ve hit their target returns, traders sell their shares to cash in on their profits.
IPO stocks are suitable as long-term investments, too, if they come from a company that is expected to grow tremendously over time. Using this IPO investment strategy can help you meet long-term goals like buying a home or building your retirement fund.
Get access to the same information as bigger investors
With IPO investing, small and retail investors are on a level playing field with institutional investors, insiders, and analysts who have more access to a company’s information in the secondary markets where regular stocks are traded.
The only source of information for all types of IPO investors is the company’s prospectus, which is a formal document where IPO details can be found.
The offer price for an IPO is also made available and transparent through the prospectus. IPO prices are fixed during the offer period. After this period, share prices go high or low depending on the changing market conditions.
Risks of IPO Investing
Not all IPOs do well. Be prepared to deal with risks just as you would with any other investments.
Understanding the risks of investing in an IPO will be useful in formulating strategies to manage them and protect your investment. Here are the major IPO investing risks to watch out for.
Companies may underperform after IPO
A company holding an IPO may look promising in terms of future growth, but it could succumb to poor performance and fail to live up to the hype.
Case in point: the infamous Uber IPO failure. Ride-sharing company Uber Technologies went public in May 2019 at US$45 per share, only to have its share price plunge on the first trading day and go a downward trend a year after.
Investing based on emotion
Companies that go public have to generate as much funds as possible, and so they heavily promote their IPO—to the point that it gets hyped up and becomes overrated.
Don’t get caught up in the excitement about an upcoming IPO. If you buy an IPO just because it’s popular and trending, there’s no guarantee that its success will be sustainable in the future.
Unlike other investment types, it’s harder to predict the chance of success in IPO investing. There may be not much information available about a company that is not listed yet.
Because it’s the first time for a company to sell its shares, it has no stock trading history. There’s no data you can use to evaluate how an IPO stock will perform.
Also, most companies that do an IPO are young and small companies with fewer products, services, and customers, limited operating histories, and less experienced management team than more established companies.
Share prices may drop after the lock-up period
Every IPO in the Philippines has a lock-up period of at least 180 days after the listing date. During this period, existing investors such as company founders, insiders, and employees cannot sell their shares.
After the lock-up period, private shareholders can sell their shares. The excess supply of shares in the market causes prices to fall.
Things to Consider Before Investing in an IPO
How do you know whether an IPO is a good or bad investment? Before you buy an IPO, carefully consider the following factors to make an informed investment decision.
How much risk you can take
Investing in an IPO is risky. The uncertainty of how an upcoming IPO will perform in the market raises the risk.
How much risk are you willing to take with your money? How much can you afford to lose? Consider your risk appetite as well as your age, financial situation, and investment goals to determine if you should buy an IPO.
Your investment strategy
Define your strategy for investing in an IPO. Never skip planning your investment strategy because IPO prices rise and fall sharply, especially in the first few weeks of listing.
To manage your risk, control losses, and decide if you should invest in a certain IPO, you need to figure out the following things:
- Whether you want to trade in the short or medium term, or invest in the long term
- Your target return rate or target price to sell your shares
- Your stop-loss plan i.e., the target selling price to cut your losses in case your IPO stock performs poorly
Company and IPO information
Learn as much as you can about the company that’s about to go public. The first document you should search and study is the prospectus, which contains all the information you need to know about a particular IPO and the company behind it.
A company’s prospectus can be found on its corporate website or through Google search (Enter the company name + “prospectus” to find the link pointing to the document you need).
An IPO prospectus is a rather long read, but it’s worth spending your time on before you invest.
Once you’ve gotten hold of a prospectus, pay attention to these important sections of the document:
- Summary – Overview of the company’s business, products and services, strategies, and financial health and prospects
- Summary of the Offer – Overview of the IPO terms, including the offer price, plans for using the money raised in the IPO, lock-up period, and requirements and procedures for the IPO subscription
- Risk Factors – Risks relating to the business, the IPO, and the local or global economy that could affect the company’s business, performance, or stocks
- Use of Proceeds – Detailed breakdown of how the funds raised through the IPO will be allocated
- Dividends and Dividend Policy – The company’s dividend payment history and plans to pay dividends to public shareholders
- Selected Financial Information – The company’s income statement, cash flow statement, revenue and profit data, and other key financial metrics that highlight important trends in the company’s financial conditions and results of operations for the past two to five years
- Management’s Discussion and Analysis – The management’s perspective on the company’s financial condition and results of operations, which can help investors understand how and why the financial results have changed and the factors that could impact the company’s future financial condition or operating results
- Business – The company’s lines of business, main products or services and their markets, strengths and strategies, business operations, organizational and corporate structure, and other key business data
Information from third-party sources
Although a prospectus has the company’s full disclosure of relevant information, it’s written from the management’s perspective and not from an unbiased independent outsider.
To find out where a company truly stands, search online for information, reports, and analysis by third parties about the company and its competitors.
How to Invest in an IPO in the Philippines
Buying an IPO stock is easier and less complicated than it seems. Any person of legal age, regardless of nationality, can participate in an IPO as long as they can pay for the minimum subscription amount within the offer period that lasts five business days.
To invest in an IPO, here are the steps you should take.
1. Find an upcoming IPO
News on a company that’s about to go public may show up on your social media feed. Your stockbroker (if you already have one) may notify you through email about accepting reservations for a new IPO.
But if you want to proactively look for potential IPOs to invest in, check the listing notices on the PSE EDGE website. To filter the search results so that only the upcoming IPOs are shown, type “initial public offering” into the Subject field and click the Search button.
2. Open a stock broker account
Having an account with a brokerage company is required for an IPO subscription.
If you don’t have one yet, you can sign up for an account with a stockbroker like COL Financial, BDO Securities, BPI Trade, or FirstMetroSec. The complete list of stock brokerage companies in the Philippines can be found on the PSE website.
Account opening can be done online through the stockbroker’s website or manually by filing an application at the broker’s office.
Submitting these documents may no longer be necessary if you already have a deposit account with the broker’s parent bank.
Once your application is approved, you’ll be required to fund your stock trading account through online banking or over-the-counter payment at the bank.
3. Subscribe to an IPO
Investors in the Philippines have two options for buying an IPO: either through their online broker or the PSE Electronic Allocation System (PSE EASy).
How to buy an IPO through an online broker
Simply follow the IPO subscription instructions emailed to you by your broker. If you haven’t received an email message, you can find the information on your stockbroker’s website.
An IPO stock purchase via a broker usually involves these steps:
- Log in to your stock brokerage account.
- Click on a link for IPO subscription or purchase.
- Indicate the number of shares you wish to buy (Make sure your account has a sufficient balance).
- Place your buy order.
- Wait for your IPO subscription to be approved. Once you get the approval, your IPO shares will be credited to your stock brokerage account on the company’s listing date.
How to buy an IPO through PSE EASy
Online brokers typically give their clients a limited time period for IPO subscriptions. If you miss the deadline, you can still buy an IPO stock online through PSE EASy. Here’s how.
- Access the PSE EASy website or mobile app and click the Register button to sign up for a PSE EASy account.
- Fill out the online registration form. Select your stockbroker as your trading participant. Also, make sure that the information you provide is consistent with your details on your brokerage account.
- Click the link on the email sent to you for your account verification.
- Wait for your broker to approve your PSE EASy registration.
- Log in to your PSE EASy account.
- Under “Active Event, choose the IPO you want to buy.
- Click the Subscribe icon.
- Enter the number of shares you wish to order and select your broker as your trading participant.
- Click the Send button.
- View the payment details.
- Click the Print/Download Payment Details to view the instructions on paying for your IPO subscription.
- Pay through a partner bank before the given deadline. Your payment will be posted in the system the next day. Your IPO shares will also be credited to your stockbroker account. Once the company is listed in the PSE, you may begin buying and selling its shares.