Bursa Malaysia Bhd believes it can capture 42 initial public offerings (IPOs) in 2024, according to the stock exchange operator's chief executive officer, Datuk Muhamad Umar Swift. Naturally, investing in a company at the IPO stage may be a strategy for some investors.
Investing in an initial public offering (IPO) or after the listing in the secondary market involves different strategies, risks, and potential rewards.
Investors often find IPOs appealing for several reasons:
Growth Potential: IPOs can provide an opportunity to invest in a company with significant growth prospects. Early investors in successful IPOs can see substantial returns if the company performs well.
High Demand: IPOs often generate excitement and media attention, leading to high demand for the shares. This can result in a strong initial price surge.
Entry Price: Investing at the IPO stage allows you to buy shares at the offering price, which can be lower than the price after trading begins.
Risks of Investing in IPOs
However, investing in IPOs also carries notable risks:
Volatility: The initial days of trading can be highly volatile. Prices can fluctuate significantly due to speculation, making it difficult to predict short-term movements.
Information Asymmetry: Information available about the company is often limited compared to seasoned companies. This can make it challenging to assess the company's true value and potential risks.
Lock-up Periods: Insiders and early investors are usually subject to lock-up periods, preventing them from selling shares for a certain period post-IPO. When these periods expire, a significant number of shares may flood the market, potentially depressing the stock price.
Hype and overvaluation: IPOs can be overhyped, leading to overvaluation. This can result in investors buying shares at inflated prices, which may not reflect the company's fundamental value.
Investing in the secondary market
The secondary market, where stocks are traded after the IPO, offers a different set of advantages and risks:
Advantages
Price Stability: Post-IPO, stock prices tend to stabilize as the market assimilates new information. This can reduce the initial volatility seen in the IPO phase.
More Information: After the IPO, more information becomes available about the company's performance, including quarterly earnings reports and analysts' opinions. This helps investors make more informed decisions.
Historical Data: Historical price data allows investors to perform technical analysis and identify trends. This data can be crucial for making informed investment decisions.
Proven Track Record: By waiting until the secondary market, investors can assess how the company performs over time, providing a clearer picture of its operational and financial health.
Risks
Missed Initial Gains: If the IPO is successful, the stock price might rise significantly in the initial trading days. Waiting for the secondary market might mean missing out on these early gains.
Market Conditions: The stock market's overall condition can impact stock prices.
Macro-economic factors, industry trends, and market sentiment can influence the stock price post-IPO.
Considerations for Investors
When deciding whether to invest in an IPO or wait for the secondary market, consider the
following factors:
Company Fundamentals
Business Model: Understand the company's business model and revenue streams. Ensure it has a sustainable and scalable model.
Market Position: Evaluate the company's position within its industry. Is it a market leader or a new entrant with potential?
Financial Health: Scrutinize the company's financial statements, including revenue, profit margins, debt levels, and cash flow. A company with strong financials is generally a safer bet.
Management Team: Assess the experience and track record of the management team. Strong leadership is crucial for the company's success.
Valuation
IPO Pricing: Compare the IPO price to the company's fundamentals. Is it priced fairly, or does it appear overvalued?
Comparable Companies: Look at the valuation of similar companies in the industry. This can provide a benchmark for assessing the IPO's valuation.
Market Conditions
Economic Environment: Consider the broader economic environment. Is the market in a bullish or bearish phase? Economic conditions can significantly impact stock performance.
Industry Trends: Analyse trends within the company's industry. Positive trends can boost the company's prospects, while negative trends can hinder growth.
Personal Investment Strategy
Risk Tolerance: Assess your risk tolerance. IPOs can be high-risk, high-reward investments, while secondary market investments might offer more stability.
Investment Horizon: Determine your investment horizon. Are you looking for short-term gains or long-term growth? IPOs might be suitable for short-term speculation, while secondary market investments are often better for long-term growth.
Diversification: Consider your overall portfolio diversification. Avoid concentrating too much of your portfolio in a single stock, especially a newly public one.
Whether to invest in an IPO or wait for the secondary market depends on individual preferences, risk tolerance, and investment strategy.
IPOs can offer substantial early gains but come with higher risks and volatility.
In contrast, the secondary market provides more stability and information, allowing for more informed investment decisions. Carefully evaluating the company's fundamentals, market conditions, and personal investment goals will help you make the best choice for your financial future.
*The writer is a former chief executive officer of Minority Shareholders Watch Group and has over two decades of experience in the Malaysian capital market.