IPO speculation could be risky. You must assess your risk tolerance level and investment objectives, i.e. whether it is for long-term or short-term before committing yourself. Spend some time to read the prospectus to understand the basic fundamentals and prospects of the company.
What are the risks?
- The allotment basis is unknown at the time of subscription. Be prepared that if the shares are heavily oversubscribed, you may only be allotted part of the shares or even no shares at all. On the other hand, if the IPO turns out to be not as popular as it is anticipated to be, then you may get more shares than you would expect.
- Some brokerages and banks offer attractive credit facilities for clients to gear up their applications for IPO shares. Whilst these loan packages may seem attractive, bear in mind that you still have to pay the financing costs even though you are not allotted any shares.
- Do not assume that the share price will necessarily rise above the offer price on the first day of trading. Performance of new shares will also be affected by the overall market sentiment and it is possible for the share price to drop below the offer price.
- If you choose an application method that involves mailing of share certificates and refund cheques, bear in mind the potential mailing risks. Besides, you may not be able to sell the IPO shares on the first day if there is any delay in receiving the share certificates.
- In general, you should have a stock account in order to sell IPO shares. For risk management reasons, some brokerages or banks may need to confirm the share certificates are in your hand and are authentic before selling them for you. Ask your brokerages or banks how long such process will take.
- The potential profits derived from an IPO investment may not offset the transaction costs and interest expense incurred if you subscribe on margin. You will incur a loss if you are unable to sell the shares above the offer price as you have anticipated. Know how much risk you can take and do not commit to a subscription beyond your means.