IPO loan

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  1. #1

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    IPO loan

    Can anyone explain to me the IPO loan concept and how it works?

    Cheers


  2. #2

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    Quote Originally Posted by losbbsol:
    Can anyone explain to me the IPO loan concept and how it works?

    Cheers

    Sure, IPO are a bit like gambling because they are little if any track record for the company you are buying. In short borrowing money for an IPO is a bit like borrowing money for gambling.

    There is one rule I follow: Never invest money you do not own

    Here what does happen if you borrow money for an IPO
    If you have more cash on hand you can try to grab more lots but you need to pay the interest on your loan no matter what.
    Let's assume that you would only get one lot w/o the extra cash and 10 lots with the borrowed money.

    A. The first day of trading, the IPO stock price go up 50%:
    You make 50% minus the interest. In terms of cash value, you earn 10 times more minus the amount paid as interest.

    B. The first day of trading, the IPO stock price go down 50%:
    You loose 50% of your investment and you still need to pay for the interest on top of that. In terms of cash value, you loose 10 times more and you still need to pay for the interest on top of that.

    Unless you know somehow that you are in case A rather than B, do you really want to take a "double risk"?

    BTW, early this year there was the IPO of Bank of China (3988) because I anticipated that it would sooner or later be part of the Hang Seng Index, it is the only IPO I ever went for. Got only one lot like everyone. I have purchased many more lots of BOC since.

    If you want to join an IPO you can. If you don't you can always grab a few lots within the first 6 monts of trading.

  3. #3

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    philippe, think u jumped the gun on the details.
    give him the basic first!

    - Generally in hk, IPO are allocated based on the amount you apply. e.g. if you apply for 1,000,000 shares (costing around HKD 3million in the case of 3988HK), you might be allocated like 20,000 shares. whereas a person applying for 50,000 shares might be given just 1,000.

    - Since most people does not have 3mil HKD to invest, and since most of these shares only give you allocation of 1% or 0.5% of your application, banks came up with IPO loan scheme.

    - You put maybe 10% of the application notional, in this case, 300,000 HKD and the bank loan you 90% of it.

    - You pay interest of the 90% for teh few days your money is actually posted at the underwriting bank.

    - If the IPO is a flop, and you need to collect all your shares (i.e. 3mil HKD worth of it), then you are going to sweat all weekend because the price is likely to drop and you will not cover back your 10% investment due to the 10times leverage.

    - Else, you get slightly more allocation, make abit of money, pay off the bank interest and still have some left for coffee.

    - I'm too lazy to apply for such allocation with so low ratio these days. just buy the shares.


  4. #4

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    Thanks for your replies. Assuming the IPO is a flop and I got allocated more shares than I bargain for, is the loan extenable beyond the 6,7 or 8 days or do I have to make a run for it?


  5. #5

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    extendable, but i think your shares will become collateral to the bank (not sure how they arrange this part). once the share value drop and hits the bank's level of comfort, they will force sell the shares to get back their money and you might not necessarily get any of your original 10% back.

    anyway they usually only offer ipo loans to good companies, that's something they wld do to protect their own interest.


  6. #6

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    Quote Originally Posted by freeier:
    extendable, but i think your shares will become collateral to the bank (not sure how they arrange this part). once the share value drop and hits the bank's level of comfort, they will force sell the shares to get back their money and you might not necessarily get any of your original 10% back.

    anyway they usually only offer ipo loans to good companies, that's something they wld do to protect their own interest.
    This thing does smell like getting margin calls.

    Freeier, you're right I jumped the gun. I was trying to say "stay away from IPO loans". It's one of these schemes (or scams) for banks to make money while riding IPOs.

  7. #7

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    haha. well, there is never the perfect scheme.
    - u price an ipo too high, u don't get the desired effect and nobody has any incentive to subscribe.
    - u price it lower, everyone wants a slice of the pie
    - if you use lottery, the winner gets the benefit
    - so they decided to allocate, and in this scenario people just tries to exploit as much the system as they can
    - u can't blame the overall set up... at least it gives people some things to look forward to..

    i've ever heard a guy that tried to do that and ended up with a 2mil USD portfolio of a half flopped IPO. but he emerged winner as the stock climbed close to 100% maybe a month or so after the IPO. not sure how much he won though, as his bank cld have liquidated much of his position if he was unable to hold it.


  8. #8

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    any views on China Communications IPO this week? Im inclined to go for it


  9. #9

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    was thinking about maxing out the loan at 90% but kinda worry about having to liquidate my assets if it sunk. Its like a Catch 22 but hey, theres no sure guarantees. Thanks for the responses guys.


  10. #10

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    If you go for the solid ones, I don't think it will sink anytime soon. but the thing is, you don't know how many shares you will get


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