What Does Breaking Issue Price Mean?

What is IPO Breaking Issue Price?

Many investors have experienced substantial gains after being allocated new shares, but there's also the opposite scenario where new shares break their issue price.

Breaking issue price refers to when a stock falls below its offering price on its first day of listing (IPO). If this occurs, investors who were allocated shares in the primary market may face immediate losses. For example, if Stock A has an issue price set at 100 yuan but closes below 100 yuan on its first trading day, it constitutes a break of issue price.

So, why do new shares typically break their issue price?

1. Before a company's IPO, underwriters usually provide a valuation range based on the company's pre-IPO financial reports. The final issue price is determined jointly by the underwriters and the company. If the issue price is set too high, it indicates overvaluation. This creates a premium at listing, causing investors to worry about overvaluation and sell on the first trading day, potentially leading to a break of issue price.

2. Another common reason is market downturns. During bear markets, the probability of new shares breaking issue price increases as market pessimism erodes investor confidence, which may result in new shares breaking issue price.
   
   

Why are breaks becoming more frequent? Has the era of easy money from IPOs ended?

With the further deepening of registration-based IPO reforms and the full marketization of new share issuance, breaking issue price is not surprising. Since 2022, first-day breaks have become frequent, and the days of easy profits from IPO subscriptions may be gone forever. According to Wind data, in the first half of 2023, 173 new stocks were listed, of which 36 (21%) broke their issue price on the first day. Among these, 18 fell more than 10% on debut. The worst performers were DF Carbon and TT Automotive, dropping 21.67% and 20.14% respectively on their first trading day.

Due to imprudent pricing by some institutions, excessively high valuations have caused some IPOs' P/E ratios to deviate significantly from normal levels. When a company's issue price exceeds its actual value, breaking issue price becomes inevitable upon listing, and the losers are typically those allocated shares and investors who buy at high prices on the first day.

Therefore, as listing requirements become looser and the registration-based system approaches, making money from new share subscriptions may become increasingly difficult, and potential gains will shrink. Investors should proactively avoid break risks by being wary of new shares with excessively high P/E ratios or issue prices. It's better to miss an opportunity than to step on a landmine—avoid blind IPO subscriptions.