Day 77 The Initial public offering

The Initial public offering

In recent years, the Chinese initial public offering share attracts lots of investors since it’s low risk and almost guaranteed return on the first day. There will be twelve new issue's shares this week, so here I would like to provide you some basic interpretation of the IPO and the process to apply for it in Chinese stock market.

The initial public offering is the process of companies issuing shares towards the financial market for the first time. Similar to other stocks, the IPO holds the target of raising funds through securities exchange market to support the company’s development. However, unlike other shares in the market, these new issued shares have the characteristics of stabilized return associate with low risk. According to the statistics in the U.S. stock exchange market, only 20% of IPO’s share price dropped blow its issue price. In China, the money effect induces the risk of investing on IPO is almost nil. That is because the initial public offering shares normally aim for the price difference between the first and secondary market. Therefore, it generally does not involve speculation in the secondary market. In conclusion, it has several features, including nil extra application cost, require sufficient liquidity of investors, and low risk plus cogent return.

The process to apply for IPO is pretty straight forward. According to the regulation of China Securities Regulatory Commission, investors should hold at least ten thousands market value shares to obtain the permission to apply. For instance, in the Shanghai stock exchange, the investor may apply for one thousand IPO shares at every ten thousands market value of share held. In fact, T-2 date is when the determination of right to apply, hence we may hold sufficient stocks on that date and sell them on T-1 for the recollection of funds. On the T date, the share will open for apply. We can apply for multiple IPOs using the same index granted by holding shares, but we may only apply once for each share. After we submit our application, the funds will be temperately frozen until T+3 date no matter we have been allocated with shares or not. The result of successful application will be announced on the T+2 date.

Personally, I recommend applies for the less preferred shares if several IPOs are issued at the same time. Because commonly the return of the IPO is almost granted at the first day, therefore our goal should be increasing the probability of successful application. To illustrate, the 603338 Zhejiang Dingli Machinery Co., Ltd. and 603030 Shanghai Trend zone Construction Decoration Group Co.,Ltd Should be taken into consideration. Since the reduction in nominal interest rate will prompt the construction industry, and the indoor decoration and special equipment supplier should also be benefited.