China IPOs: A Profitable Investment Trend

| January 4, 2011 | 0 Comments

By now I’m sure you’ve heard of all the myriad opportunities in Chinese stocks…

Not long ago, Chinese stocks were practically unstoppable.  You could just throw a dart at a list of Chinese stocks and pick a huge winner.  Nearly ever stock with the name “China” in it went to the moon.

But today’s Chinese markets require a bit more expertise.  The country is growing so fast it has many investors worried the economy is overheating.  And these worries are scaring away some investors.

But I think these worries are being overstated…

China is still one of the best growth stories out there.  The country is working to manage its growth and keep a rein on inflation.  And if you know what to look for, Chinese stocks hold immense potential to generate wealth.

After all, the country’s economy is still growing at a near 10% clip.  And with nearly 1.3 billion people, China is quickly becoming one of the largest consumer marketplaces in the world.

Clearly, their markets remain filled with opportunity for business and investors alike.

One of my favorite ways to play the Chinese growth story is through IPOs…

As you may know, an IPO (Initial Public Offering) is when a private company goes public.  By going public, investment bankers raise money for the company so they can expand their business.

Many up-and-coming Chinese companies are listing on American exchanges.  By listing on the NYSE, AMEX, or Nasdaq, Chinese companies increase public exposure and attract much needed investment capital.

Also, by listing on these US exchanges, Chinese companies must comply with many US reporting standards.  By accepting these standards, Chinese companies lower their borrowing costs because of better transparency.

So the whole IPO process is great for Chinese companies.

But it’s also great for American investors.

By listing on US exchanges, the full potential of the Chinese economy is open to investors like you and me.

And judging by recent performance, US investors love the China story…

Chinese IPOs outperformed the US broad markets by a wide margin in 2010.  In fact, according to CNBC, China IPOs were up an average of 36% last year.  Compare that to a 10% gain in the S&P 500 and you see why investors have their eyes peeled for the next hot China IPO.

The reason for the outperformance is simple…

The China growth story is going strong.  Investors want to get their hands on what could be the next big business opportunity in China.

But you shouldn’t just rush out to buy Chinese IPOs willy-nilly…

You need to take some important steps so you don’t end up with oversized losses instead of oversized gains.

Be sure to read the 424(b)(4) on each Chinese IPO you’re thinking of putting your hard earned money in.  This SEC required document will give you the low-down on the company and what their plans are.

After a company is public, take a look at their stock chart and pay close attention to the price action.  Some IPOs take off and never look back after the first day of trading.  But others surge during the first couple of days of trading, only to sell-off just as fast in following days.

These quick pullbacks shake a lot of investors out with big losses.  But once the shakeout is done, the stock can turn around and push higher. Due to this price uncertainty, make sure you don’t “load the boat” on any one IPO.  And pick your entry point carefully.

With all the growth China is experiencing, the IPO market for these stocks is likely to stay hot for some time.  Be sure to take advantage of it!

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Category: Foreign Markets

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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