Initial Public Offering (IPO) Investment Guide: Comprehensive Analysis of Listing Requirements, Risks, and Returns in Hong Kong and US Stocks

What is the essence of IPO investment?

When listening to financial news, you often hear about a company launching an IPO. This concept may still be unfamiliar to many people. IPO stands for Initial Public Offering, which is the process by which a private company issues shares to the public and becomes a listed company.

The core significance of this process lies in the change of ownership attributes—from private to public. For the company, an IPO is a key channel for fundraising; for shareholders, it is a golden opportunity to cash out and realize profits; for ordinary investors, it opens the door to participate in the growth of high-quality enterprises.

Private companies usually pursue an IPO because their initial financing can no longer support business expansion. Through an IPO, the company can raise funds to expand operations, repay debts, and enhance brand image. Investors can also buy shares on the open market, achieving diversified asset allocation.

How high are the listing thresholds for US stock IPOs?

The US stock market is divided into two main exchanges: the New York Stock Exchange (NYSE) and NASDAQ, each with different listing requirements.

NYSE requirements:

Applicants can meet any of the following conditions:

• Pre-tax profits of at least $100 million over the past 3 fiscal years, with annual profits exceeding $25 million in the last 2 years
• A global market capitalization of at least $500 million, with revenue of no less than $100 million in the past 12 months, total cash inflows of at least $100 million over 3 years, and annual cash flow in the last 2 years not less than $25 million
• A global market capitalization exceeding $750 million, with revenue of at least $75 million in the last 2 fiscal years

NASDAQ requirements:

Based on the national market, meeting any of the following standards:

• Earnings before tax of over $1 million in the most recent full year or any two of the past three years, shareholders’ equity of at least $15 million, public float market value of no less than $8 million, and at least 3 active market makers
• Shareholders’ equity exceeding $30 million, with 2 years of operating history, public float market value of at least $18 million, and at least 3 market makers
• Market value of listed securities at least $75 million, public float market value of at least $20 million, and at least 4 market makers
• Total assets and revenue of any two years in the past 3 totaling at least $75 million, public float market value of no less than $20 million, and at least 4 market makers

Compared to NYSE, NASDAQ is relatively more friendly to tech startups, while NYSE emphasizes profitability and scale.

What are the entry conditions for Hong Kong stock IPO investment?

The Hong Kong stock market mainly focuses on the Main Board. IPO applications need to meet one of the following conditions:

• Profit exceeding HKD 20 million in the most recent year, with cumulative profit of at least HKD 30 million over the previous two years, and profit of at least HKD 500 million at listing
• Market capitalization of at least HKD 4 billion at listing, with revenue of no less than HKD 500 million in the most recent fiscal year
• Market capitalization of at least HKD 2 billion at listing, with revenue of at least HKD 500 million in the most recent fiscal year, and cumulative operating cash inflows of at least HKD 100 million over the previous 3 fiscal years

Compared to US markets, Hong Kong has clearer requirements for enterprise maturity, placing more emphasis on operational sustainability and cash flow health.

How many stages are involved in the IPO listing process?

Hong Kong IPO process:

From deciding to go public to successful issuance, it generally involves 6 stages. First is the institutional engagement phase, where sponsors, accountants, lawyers, and other intermediaries are hired; then detailed due diligence and audits are conducted, including financial verification and drafting the prospectus; third, the company’s business, assets, and equity are optimized and reorganized, and corporate governance is improved; fourth, application materials are submitted to the China Securities Regulatory Commission (CSRC) and Hong Kong Stock Exchange (HKEX) for acceptance; fifth, investor roadshows are held, pricing is determined, and the official public offering takes place in Hong Kong; finally, the issuance is completed, and trading begins.

US IPO process:

The US process is relatively more complex. First, an investment bank is hired as the lead underwriter, and an underwriting team is formed; then, Form S-1 and related documents are submitted to the U.S. Securities and Exchange Commission (SEC); multiple rounds of pre-review, feedback, and revisions are conducted; a roadshow is organized to promote the company to investors; the offering price and share quantity are finalized; finally, the stock is listed and traded on NASDAQ or NYSE.

Although the US process involves more steps, it offers higher transparency, allowing investors to access more detailed company information.

What are the main attractions of IPO investment?

Cost advantage: The IPO price is set proactively by the company, usually representing the cheapest entry point. After listing, stock prices tend to rise quickly, and missing the IPO window may mean no similar low-cost opportunity again. For investors optimistic about a company’s long-term growth, this is a rare chance to invest at the best price.

Potential for substantial returns: Most companies launch IPOs during favorable market conditions, meaning the overall market environment is optimistic. Plus, high-quality companies often go public at relatively low prices, allowing investors to profit from subsequent increases.

Relative information symmetry: Investors mainly obtain information through the prospectus, and large institutional investors do not have additional informational advantages. This creates a relatively fair competitive environment for retail investors.

What risks should be avoided in IPO investment?

Selection risk: Not all IPOs are worth chasing. If the chosen company is not a high-quality target, even if it successfully lists, retail investors may find it difficult to sell in time when large funds and institutional investors start selling, risking becoming bagholders.

Pricing pressure limits gains: Companies tend to price their IPOs by fully digesting all positive factors into the offering price. This means the short-term upside after listing may be limited, and investors expecting quick profits should adjust their expectations.

Liquidity traps: Although initial trading volume for new stocks is high, once enthusiasm wanes, liquidity can dry up quickly, making it difficult for investors to exit timely.

Market volatility impact: The IPO market is closely related to overall stock market conditions. During bear markets or market corrections, new stocks often perform poorly. Investors need to assess the market environment carefully.

What is the proper approach to IPO investment?

Investors interested in IPOs should establish a rational investment framework. First, thoroughly research the company’s fundamentals—including business model, competitive advantages, and financial health—avoiding blind following; second, pay attention to industry prospects and market conditions to prevent chasing high at market peaks; third, control position sizes and avoid concentrating too much capital in a single new stock; finally, set clear profit-taking and stop-loss plans, and do not be swayed by short-term fluctuations.

Overall, IPO investment offers opportunities to participate in the growth of high-quality companies but also carries the risk of overvaluation. Investors need to balance opportunities and risks, using rationality and patience rather than greed and impulsiveness, to achieve steady returns in IPO investments.