As an FX trader, did you know that the IPO market can affect the way you trade, and you should certainly pay attention to up-and-coming IPOs and perhaps even use them to diversify your existing portfolios? If not, then maybe it is worth reading exactly how and why IPOs can affect you as a currency trader.
What are IPOs, and why should forex traders care about them?
An IPO, or Initial Public Offering, is when a company first goes public and sells company shares to the public. This usually happens when a company wants to raise money to grow its business and invest in its own developments.
When a company goes public and conducts an IPO, it will list its shares on a stock exchange, opening up its company performance for speculation on the stock market and allowing external investors to participate in funding the company and potentially even getting a say in how the company is run. The price of its shares, over time, will go up and down based on supply and demand and due to the performance of the company.
While IPOs seem like something stock markets should care about, they can also have a significant impact on the forex market and FX traders. This is because IPOs often involve large amounts of money being moved around and invested. When a company raises money through an IPO, it usually does so in US dollars as it is world’s strongest currency. It means that there will be a lot of buy orders for USD, which can lead to currency strengthening depending on the size of the company.
IPOs in Hong Kong can also lead to the Hong Kong dollar strengthening against the US dollar, particularly if the company is a big name and its going public will lead to a rise in dollar inflows.
Trading IPOs to diversify your portfolio
Even though IPOs can change the price movements of the Hong Kong dollar, it admittedly will not be able to make much of a dent on the market unless it is the IPO of a huge company. Which is why there is another reason why FX traders who normally only trade currencies may want to care about IPOs – because these fresh shares can be a means of diversification.
When you invest in shares on top of currencies, you can reduce your risk of putting all your eggs in one basket. If currency markets suffer a tumble, you will not be at risk of taking a hit across all your investments, because you will always have your stocks to cushion the blow.
IPOs make good portfolio diversifiers because they are transparent in pricing. As they are new to the market, investors big and small will be able to clearly see the price per security issued in the order document. Big investors will not have any advantages over smaller ones, and insider trading is also strictly banned. This can provide great security to rookie stock traders who would like to start trading stocks but do not know where or how to start.
Finally, diversifying your portfolio by investing in IPOs also mean being able to potentially make a profit based on a small deposit. When companies first list their shares publicly, the IPO price is typically when their shares at their cheapest when there is a huge growth potential ahead for the company.
The potential risks associated with trading Hong Kong IPOs
Despite its advantages, trading Hong Kong IPOs can be a risky proposition for FX traders. It is because there is a lot of uncertainty surrounding these new listings. Two of the biggest risks associated with investing in IPOs are the risks that the listing could be delayed or cancelled, or shares could grossly underperform.
In these cases, as an FX trader, you will still have the consolation that at least not all your investments were made in the IPO and that you still have your Forex trades to fall back on.
Upcoming IPOs in Hong Kong to keep an eye out for
With that said, if you are an FX trader planning to diversify your portfolio by investing in IPOs, there are a few upcoming ones in Hong Kong that are highly anticipated.
Zhuhai Wanda Commercial Management Group
The Zhuhai Wanda Commercial Management Group is a property management arm of the Chinese real estate tycoon Wang Jianlin’s corporation, the Dalian Wanda Group. It has a valuation of US $28 billion, and the company’s preliminary listing document has been on the Hong Kong Stock Exchange website since Q3 of last year (2021). The excitement for its IPO is heating up, as it is reportedly planning to raise up to $4 billion when it first goes public.
Leapmotor
Another highly anticipated IPO is Leapmotor, which is backed by Sequoia Capital. Leapmotor is an Electric Vehicle firm that is based in Hangzhou, China, and it is also backed by the local regional government. There are talks of potentially raising up to US $1 billion for its IPO as it plans to list on the Hong Kong Stock Exchange.
Weilong Delicious Global
A third but equally exciting potential IPO is that of Weilong Delicious Global, a Henan-based company that specialises in manufacturing soybean and egg snacks. It is expected to raise US $1 billion, and it has already been attracting investors from around Asia and the world as of last Spring.
Getting started investing in IPOs
If you are interested in keeping up with IPO announcements and potentially trying your hand at investing in some of these freshly listed stocks, you can check out Saxo Bank. Simply visit their website for the latest news and companies and open an account to start investing.
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