What Is a New Stock Breaking Its Issue Price?
Many investors have experienced the situation where a new stock surges after winning the lottery, but there is also the opposite scenario where a new stock may break its issue price.
"Breaking the issue price" refers to when a stock falls below its initial public offering (IPO) price on its first trading day. If this happens, investors who won the lottery in the primary market may start losing money right away. For example, if Stock A’s IPO price is set at 100 yuan, but its closing price on the first trading day is below 100 yuan, it constitutes a break of the issue price.
So, why do new stocks typically break their issue price?
1. Before a company goes public, underwriters usually provide a valuation range based on the company’s pre-IPO financial reports. The final issue price is determined by the underwriters and the company. If the issue price is set too high, it indicates an overvaluation. This means the stock is listed at a premium, and investors may fear the stock is overpriced, leading them to sell on the first trading day, which could cause the stock price to break the issue price.
2. Another common reason is a weak market. During a bear market, the likelihood of new stocks breaking their issue price increases. Poor market conditions erode investor confidence, which may lead to new stocks breaking their issue price.
Why Are Breaks So Frequent? Is the Era of Easy Money from New Stocks Gone?
As the registration-based IPO reform deepens, new stock issuance has become fully market-driven, making breaks unsurprising. Since 2022, first-day breaks have become frequent, and the days of easy profits from new stock subscriptions may be over. 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 them, 18 fell by more than 10% on their debut. The worst performers were DF Carbon and TT Automotive, which dropped 21.67% and 20.14%, respectively, on their first trading day.
Due to imprudent pricing by some institutions, some new stocks are issued at excessively high price-to-earnings (P/E) ratios, far exceeding normal levels. When the issue price is higher than the company’s actual value, a break is inevitable upon listing, and the losers are usually those who won the lottery or bought at high prices on the first day.
Therefore, as requirements for new stocks loosen and the registration-based system approaches, making money from new stocks may become increasingly difficult, and profits may shrink. Investors should proactively avoid break risks by staying cautious about new stocks with excessively high P/E ratios or issue prices. It’s better to miss out than to step on a landmine—avoid blindly subscribing to new stocks.
