The IPO and secondary market options for profitable investing
An initial public offering (IPO) provides the opportunity for investing in a company that was formerly a privately owned enterprise.
Investors can become part owners of large and qualified companies as they go public through listing on the stock exchange – either buying at the IPO stage or in the secondary market.
Trading opportunities and profits may differ between these two types of investments.
What is an IPO?
An IPO is the process whereby a company, whether a public or private enterprise, issues a certain percentage of its shares to the public to raise funds to expand its business operations.
What is the secondary market?
The secondary market, or stock market, is an avenue that allows investors to buy publicly issued stocks and trade them with other investors after companies are successfully listed on a stock exchange, such as the Cambodia Securities Exchange.
Investing in an IPO or primary market
Investing in a primary market means investors are registering to buy shares from a company that is conducting an IPO through a selling agent.
Investors need to contact the selling agent and complete a request-to-buy form, and deposit the required money.
Every successful transaction is executed at an IPO price already set during the book building process – a bidding exercise to determine the share price.
During the IPO, investors can either participate in the book building or wait until subscription to purchase shares.
However, with 70 per cent of the total issued shares allocated to the investors who successfully purchase at the book building period – those who submit a price higher or equivalent to the announced price – this can act as an incentive to be an early bird.
Investors who fail to purchase in the book building process can register to acquire the remaining 30 per cent of shares at the IPO price during the subscription period.
Benefits of investing in an IPO
The primary advantage of investing in an IPO is the opportunity to buy popular stocks at a good value ahead of other investors and later sell the shares on the secondary market to make a profit.
After the successful listing of a stock on the market, shares are freely traded, giving new investors and those who failed to purchase the shares at the IPO stage a chance to acquire them on the secondary market.
While the stock price can dramatically rise in the first trading days or weeks compared to the IPO price due to an increase in demand from investors, fluctuations in share prices are subject to supply and demand in the market.
If investors buy at IPO and resell at the secondary market on the first trading session or the opening session, after the listing of the shares, they can enjoy the advantage of a loose price limit ranging between 90 per cent to 150 per cent of the IPO price.
In contrast, the daily price limit during a normal trading day is arrived at by adding or subtracting only 10 per cent of the daily base price to or from the daily base price.
A second advantage is that an IPO can pave the way for retail investors to invest in companies with potential that may have been previously unknown.
As retail investors can find it difficult to start investing in upstanding companies that are yet to be listed, an IPO creates an opportunity for investors to buy such shares to provide capital for the company’s expansion.
Therefore, a third advantage is that investing in an IPO can be very profitable because the investment made at this first stage can prove to be low – as the company grows, the share price can increase accordingly.
In recent years, famous businesses such as Airbnb have gone public through an IPO.
Airbnb’s IPO price last December was $68 per share, but by mid-May this year, its price was around $130 to $140 per share.
Therefore, choosing the right stock can allow investors to make a healthy gain in the secondary market.
Investing in the secondary market
Investing in secondary market means trading is executed between investors via the stock market’s trading system through the Auction Trading Method (ATM), where both parties do not know one another, except those using the Negotiated Trading Method (NTM) to trade.
The order placement can be done through a broker or the Mobile Trading System (MTS).
Benefits of the secondary market
The main benefit from this type of investment is the countless transactions made in the secondary market, contrary to an IPO or public offering (PO) whereby it can only happen when there are new listed companies or when current listed companies issue additional shares.
Shares successfully listed on the market can be freely traded during market hours – 8am-3pm daily, excluding weekends and public holidays.
In contrast to an IPO, where the price has been set since the book building exercise and all shares are traded at this price, share prices in the secondary market fluctuate according to supply and demand in the market – which is often influenced by factors such as a company’s profitability.
Price fluctuations allow investors to make capital gains from day trading.
Since there are lots of trading transactions of listed stocks in the secondary market, the number of shares that investors can buy is much higher than the new issued shares at the IPO or PO stage.
Therefore, investors can order
more shares than at the IPO stage, where the number of newly issued shares is limited and depends on the number of subscribers.
In the secondary market, the number of buyable shares will decrease if there are more subscribers because they are divided proportionally.
Investing in the primary or secondary markets can both be profitable for investors.
However, being the first to invest should not taken for granted as it can allow investors the opportunity to generate more profit.
Nevertheless, at whichever at stage of investment, investors should look at good stocks that are valued at a price commensurate with the company’s potential to ensure the effectiveness of the investment.