After a “crash” in March this year, the Australian equity market is booming again.
But within the stock market itself, there is also a mini-boom happening in initial public offerings, or IPOs.
Financial planners say their clients, tired of earning almost nothing on their bank deposits, are handing over their money to buy those new stocks.
“I would say the majority [want to invest in IPOs]Says James Gerrard, founder of financialadvisor.com.au.
“Whether young or old, there is a risk with IPOs, but with the stock markets rising and optimism going into 2021, clients of all ages are happy to roll the dice.”
An exceptional year for announcements
Companies looking to grow and take advantage of investor interest are rushing to list, and so far this calendar year 115 companies have listed on the Australian Stock Exchange, up 25 % compared to last year.
The Australian Securities Exchange says this has been a bumper year for company listings and “the busiest half for new listings of late”. ASX has confirmed that 115 shares have been launched this year, with 87 floating in the past six months alone.
“Our pipeline has run until the third week of December, when it normally ends the first,” said an ASX spokesperson. “It’s certainly been a while since we’ve seen so many announcements in such a concentrated time.”
The IPO boom is a global phenomenon.
According to data provider Refinitiv, companies raised nearly $ 300 billion through floats around the world in 2020.
In Australia, companies have raised $ 5.2 billion from investors.
So what is an IPO?
An initial public offering occurs when a private company applies to be listed on a stock exchange, so that its shares can be listed on a stock exchange.
Historically low interest rates are pushing stocks higher. But investor sentiment is also supported by billions of government stimuli and the promise of a coronavirus vaccine in 2021.
Independent trader Danielle Ecuyer calls it “hot money”.
“You get a lot of hot money and, excuse the expression, but it’s kind of like the pump and dump scenario,” she says. “And I think that’s the hardest part for new investors, figuring out what’s going to be a stayer, what’s going to be high quality action on the track.”
Fast cash or equally fast loss
But the process of signing up as a founding shareholder of a company is a surprisingly simple task.
Once you have completed a prospectus and sent it to the company (to be added to the share register) or your broker, you can sit down and wait for the share to arrive on the boards of directors. stock Exchange.
Once it hits the boards, the stock price will go up, down, or stay the same.
You can sell your entry the day it is listed (in a matter of minutes if you wish) or keep it for as long as it is on the boards. This is the opportunity to quickly earn a lot of money.
Likewise, says Gerrard, you can also lose a lot of money in an instant.
“So, for example, if the company you bought IPOs for $ 2 a share, but the stock market estimated it was only worth $ 1, you could be down 50% on day one. It’s a bit of an adventure in the unknown when you buy an IPO. “
And the Ecuyer trader warns that most amateur investors don’t have the stomach for such risky trading activities, especially those who don’t follow the market every minute of the day.
Pricing of an IPO
For first-time investors, determining whether a company’s listing price is over or underpriced is the biggest challenge.
This is because it is the job of professional investment bank analysts to do so.
Companies wishing to list on the stock exchange will ask an investment bank to subscribe to their offering.
This means that the bank’s analysts have to analyze the numbers and determine what the company that wants to list is worth.
From there, analysts set a listing price.
Many small businesses list on ASX for anything from 15 cents to $ 1.00.
Another phenomenon of coronavirus
The COVID-19 economic crisis has resulted in historically low interest rates and huge political stimulus.
This means that a once-in-a-generation stock market crash has resulted in an equally impressive bull market.
But the level of interest in IPOs is also a testament to Australians’ desire to make big bucks fast.
Any profit made on an IPO is taxable, but it is possible to make thousands of dollars in an afternoon, assuming you invest thousands.
Some commentators are already predicting that the financial landscape in 2021 will be dominated by investors seeking double-digit investment returns in the hope of generating wealth.
Evidence suggests that this is already well underway and that ordinary Australians are taking risks they otherwise would not have taken.