An initial public offering (IPO) refers to the process of a company issuing shares to the public for the first time. In Hong Kong, IPOs are often oversubscribed, which means more demand for shares than what is available. It can lead to situations where people who were allocated shares resell them at a premium, known as IPO flipping.
When a company goes public, it will work with an investment bank to underwrite the offering. The investment bank will allocate shares to different institutional and retail investors based on demand.
Some investors who are allocated shares will resell them immediately after the IPO before the shares start trading on the stock exchange, known as flipping. Flippers hope to sell the shares at a higher price than what they paid for them to make a profit.
Trading on the stock exchange
Once the shares start trading on the stock exchange, their price will be determined by supply and demand. If more demand for the shares is available, the price will go up.
Making a profit
If an investor sells their shares for a higher price than what they paid, they will have made a profit from flipping.
Some risks are involved in flipping, such as the share price might not go up after the IPO, and it could happen if there is less demand for the shares than expected.
What are these risks?
- The share price might not go up.
- The company might not function as well as expected, leading to a lower share price.
- The investor might not be able to sell all of their shares.
- The investor might be unable to sell their shares at the price they want.
- The investor might not be able to find a buyer for their shares.
How can traders mitigate these risks?
Diversify your investment portfolio
Traders can diversify their investment portfolio by investing in different shares such as blue-chip stocks, penny stocks, and warrants.
Do your research
Before flipping, it is essential to research the company and the market conditions, and it will help you make more informed decisions and reduce the risk of losses.
Have a stop-loss strategy
A stop-loss strategy is an essential tool to help traders limit their losses. It involves setting a price at which you will sell your shares if they fall in value.
Use a limit order
When flipping, traders can use a limit order to set the price they are willing to sell their shares. It helps mitigate the risk of selling at a lower price than you had hoped.
Use a stop-limit order
A stop-limit order is similar to a limit order, including a stop price, which is the price you are willing to sell your shares if they start to fall in value.
When should traders do IPO flipping?
When the company is well-established
It is generally easier to flip shares of well-established companies because more information is available, and they are less likely to experience significant changes.
When the market is bullish
The market is said to be bullish when share prices are rising. It can create a favourable environment for flipping, as there is more share demand.
When there is high demand for the shares
If there is high demand for the shares, it is more likely that you will be able to sell them at a higher price. It can happen if the company has solid fundamentals and is in a growing industry.
When you have a good understanding of the risks involved
Before flipping, it is essential to have a good understanding of the risks involved, and it will help you make more informed decisions and reduce the risk of losses.
When you are prepared to sell your shares
If you are not prepared to sell your shares, you may miss out on the opportunity to make a profit. It is vital to plan to take advantage of market conditions.