IPO Subscription

1. What Is IPO Subscription?

Participating in the subscription for newly issued shares; if allocated shares, you purchase stock that is about to be listed.

2. Why IPO Subscription Used to Be Considered Profitable

A-share IPOs previously operated mainly under an approval system, with substantial constraints on issue pricing, so many new listings experienced large first-day gains. Under the comprehensive registration-based system, IPOs can also break below the issue price and produce losses.

A-share issuance has since moved to a full registration-based system. IPO subscription is not guaranteed to be profitable, and new shares can trade below their issue price.

3. Hong Kong IPO Subscription

3.1. Characteristics

3.1.1. Broad Allocation (Retail-Friendly)

The allocation mechanism tries to give accounts at least one board lot before further allocation.

3.1.2. Greenshoe Mechanism

3.1.2.1. What It Is

• Overallotment option.
• Involves issuer - lead underwriter - investors.
  • The issuer issues shares, the lead underwriter sells them, and investors buy from the underwriter.
  • Example
    • Tencent Music lists and issues 100 shares, Merrill Lynch handles the sale, and there is an additional 15-share overallotment option.
    • If demand is strong, the lead underwriter may exercise the overallotment option under the deal terms and obtain additional shares from the issuer to cover the overallotment.
    • If the post-listing price is weak, the lead underwriter may, instead of fully exercising the option, buy shares in the market to cover the short overallotment position and stabilize the price; this is not simply “buy 15 shares and resell them.”

3.1.2.2. Purpose

• When the price rises, all three parties benefit.
• When the price falls, investors can lose money.

3.2. Cornerstone Investors

3.2.1. What They Are

• Major institutional investors, large business groups, well-known wealthy investors, or their companies commit to buying new shares and accept a lock-up period such as six months under the deal terms.
• This provides credibility signaling.

3.2.2. Purpose

• For a cornerstone investor, the benefit is securing sufficient allocation.
• For an ordinary investor, having cornerstone investors is generally preferable to having none.

3.3. Hong Kong vs. A-Shares

3.4. Grey-Market Trading

3.4.1. What It Is

• A compliant trading arrangement offered by some brokers.
• Public trading is through HKEX; grey-market trading takes place through broker systems before official listing.
• 

3.4.2. Why It Exists

• Grey-market trading is a preview before listing and reflects investor sentiment.

A-Share IPO Subscription

It is not guaranteed profit; IPOs can break below the issue price and produce losses.

4. Note

• Subscribe to the IPO, do not speculate after listing; sell on the first day.

5. References

• IPO Subscription - Baidu Baike
• The Real Risks and Returns of Hong Kong IPO Subscription - Zhihu
• Cornerstone Investors in Hong Kong IPOs - Zhihu
• Greenshoe Mechanism in Hong Kong IPOs - Zhihu
• Grey-Market Trading Is Only a Tool - Zhihu
• Convertible-Bond IPO Subscription - Zhihu
• Why Not to Speculate on Newly Listed Shares - Zhihu