Understanding the meaning of IPO in one article: A must-know guide for beginners on listing pathways and investment opportunities

Why Are More and More People Paying Attention to IPOs?

Opening financial news, headlines like “Company X Launches IPO” appear frequently. But do you really understand what IPO means? Simply put, an IPO is the process by which a private company first issues shares to the public, becoming a publicly listed company. The full English term is Initial Public Offering.

What is the essence of this transformation? When a company grows from a small-scale funding stage by founders to needing more capital to support development, an IPO becomes a critical exit for financing. Through an IPO, the company can raise huge amounts of funds from the public for expansion, debt repayment, and upgrades, while investors can buy shares of a growth-oriented company at relatively low prices — a win-win situation.

Investing in IPO New Stocks: Opportunities and Traps Coexist

Why invest in IPOs?

First, the IPO price is often the lowest point in the company’s stock price history. Many high-quality companies are private, making it difficult for ordinary investors to participate. IPOs break down this barrier, giving retail investors a chance to enter at the cheapest price. If you miss the IPO pricing, the stock price may soar afterward, making it costly to get in later.

Second, companies that go public via IPO are usually launched during a bullish market period. This means the market environment is favorable, and the probability of stock price appreciation is higher. Plus, high-quality companies listing at relatively low prices allow investors to share in the gains from the listing surge.

Another advantage is information symmetry. All investors (big or small) learn about the company through the prospectus, and institutional investors do not possess more insider information than retail investors. This somewhat protects ordinary investors.

But risks should not be ignored:

First, there is the risk of hype around new stocks. If the company you choose has mediocre investment value, and large institutions and well-funded investors start selling off, retail investors may find it hard to keep pace. You could face losses.

Second, the IPO price already reflects all positive factors about the company. This means short-term gains are limited, and long-term holding should be prepared for.

Hong Kong Stock IPOs: Just Look at These Hard Indicators

The Main Board of Hong Kong Stock Exchange is the most common listing platform. Companies must meet any one of the following financial conditions:

Condition 1: Profit of at least HKD 20 million in the past year, a total profit of at least HKD 30 million in the previous two years, and a profit of at least HKD 500 million at the time of listing.

Condition 2: Market capitalization of at least HKD 4 billion at listing, and revenue of at least HKD 500 million in the most recent financial year.

Condition 3: Market capitalization of at least HKD 2 billion at listing, revenue of at least HKD 500 million in the most recent financial year, and a total operating cash flow of at least HKD 100 million over the past three financial years.

The Hong Kong IPO process involves seven steps:

Selecting intermediaries (sponsors, accountants, lawyers, etc.) → Due diligence and audits → Business and asset restructuring → Submission of application to the CSRC and HKEX → Roadshow preparation and investor communication → Reasonable pricing → Official IPO issuance. The entire process involves multiple regulatory checks and professional oversight.

U.S. Stock IPOs: Different Thresholds on Two Major Exchanges

NYSE Listing Conditions:

Condition 1: Pre-tax earnings of at least USD 100 million over the past 3 fiscal years, with over USD 25 million in each of the last 2 years.

Condition 2: Global market value of at least USD 500 million, revenue of at least USD 100 million in the past 12 months, and total cash inflow of at least USD 100 million over the past 3 fiscal years, with each of the last 2 years having cash inflows of at least USD 25 million.

Condition 3: Global market value of at least USD 750 million, with revenue of at least USD 75 million in each of the last 2 fiscal years.

Nasdaq Listing Conditions (Example for the National Market):

Condition 1: Pre-tax profit of USD 1 million in the most recent full fiscal year or any two of the last three years, shareholders’ equity of at least USD 15 million, public float of at least USD 8 million, and at least 3 active market makers.

Condition 2: Shareholders’ equity of at least USD 30 million, two years of operational history, public float of at least USD 18 million, and at least 3 active market makers.

Condition 3: Listed securities market value of at least USD 75 million, public float of at least USD 20 million, and more than 4 active market makers.

Condition 4: Total assets and revenue of at least USD 75 million in the most recent full fiscal year or any two of the last three years, public float of at least USD 20 million, and more than 4 active market makers.

The U.S. IPO process generally includes: hiring investment banks as underwriters → submitting registration to the SEC → initial review and feedback → roadshow and pricing → final listing and issuance. The whole cycle usually takes several months.

How to Rationally View IPO Investments?

Participating in IPOs can bring attractive returns, but keep in mind:

Thoroughly understand the company’s fundamentals and financial health before IPO. Do not get carried away by short-term hype.

Due to market volatility, avoid chasing short-term gains excessively. Long-term holding and diversification are the prudent approach. Adjust strategies timely based on market changes.

Beginner investors should start by understanding IPO meaning and listing conditions, gradually building a framework of knowledge about the IPO market. Combine this with your risk tolerance and investment goals to select suitable targets.

In summary, IPOs are both opportunities and challenges. Master basic knowledge, stay cautious, do your homework, and you can profit from IPO investments.