IPOs - Chances, Gains and Risks

"IPO" by Got Credit is licensed under CC BY 2.0

For those newbies in stock market, you might think that getting shares of an IPO is just a decision to get shares or not. In reality, your chances will depend on the number of shares available and the demand for that particular stock. Lately, IPO became synonymous with the word “raffle”.

Wikipedia defined Initial public offering (IPO) as a type of public offering in which shares of stock in a company usually are sold to institutional investors that in turn sell to the general public, on a securities exchange, for the first time. Through this process, a private company transforms into a public company. Initial public offerings are used by companies to raise expansion capital, to possibly monetize the investments of early private investors, and to become publicly traded enterprises. A company selling shares is never required to repay the capital to its public investors. After the IPO, when shares trade freely in the open market, money passes between public investors. Although IPO offers many advantages, there are also significant disadvantages, chief among these are the costs associated with the process and the requirement to disclose certain information that could prove helpful to competitors, or create shaky bridge with the existing vendors. Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a prospectus. Most companies undertake an IPO with the assistance of an investment banking firm acting in the capacity of an underwriter. Underwriters provide several services, including help with correctly assessing the value of shares (share price) and establishing a public market for shares (initial sale).

There are 2 ways to get shares of an IPO. First is thru a broker. Percentage of total shares will be distributed to existing brokers and those shares distributed to brokers will be available for the clients of each broker which is also often raffled. Second way is thru an LSIP (local small investor program) wherein a local investor can get maximum of 25,000 Pesos worth of shares directly thru the underwriter. Similar to shares offered by the broker, certain percentage of total shares is available for LSIP. You will fill up forms, provide a check, have the broker where you will lodge your shares acknowledge the document, and line up for documents verification and acceptance.

2015 First IPO - CROWN

In the case of Crown Asia Holdings (CROWN), the first IPO of 2015, LSI shares were more than 3 times oversubscribed and again we heard the word raffle. Many questions arise from this LSIP process like why the offer accepted more subscription after determining it is already oversubscribed and what are the controls implemented for those using dummies to get more shares. The concept of first come first serve is not observed because according to the underwriter, they are required to accept all the subscription during the declared period. Those who were not able to get shares thru the raffle will be refunded with the amount subscribed. I hope they can improve the succeeding LSI process that will promote fairness and convenience for the investors.

On the list of 15 since 2011, I got allocation for the 8 (SSI, RRHI, RWM, TUGS, DNL, EW, GTCAP, and SMC) but failed to get some share for the 7 (PBB, AUB, DD, CNPF, PSPC, X, CROWN). A different story for CROWN since I tried LSI (local small investor) process to acquire some shares. In my case, I got a 53% success of getting shares from the list above. For CROWN which is more than 3X oversubscribed, there is 30% chance of getting an allocation. Would you recommend getting a loan just to subscribe to an IPO? I strongly discourage using borrowed money for stock market investments.

From among the list there are notable baggers in the name of GTCAP, DNL, DD, and X. There are several stocks on the list who already released some cash and stock dividends and the gain/loss percentage should be adjusted. In the book written by Rolf Dobelli, The Art of Thinking Clearly, he mentioned a term survivorship bias, the probability of success is always highlighted while failure is often neglected. Don't fall into this trap.