Going Public( IPO): Everything Investors Need to Know About Entering the Stock Market

What is an Initial Public Offering (IPO)? Understanding the Core Concept

Initial Public Offering (IPO) refers to the process by which a private company officially enters the securities market and offers its shares to the general public for the first time. Through this process, the company achieves its primary goal of capital raising, and investors gain new opportunities to participate in high-growth potential companies.

There are various reasons why a company chooses to go public. When large-scale funding is needed for expanding research and development, broadening business areas, repaying existing debt, or pursuing mergers and acquisitions, this procedure is undertaken. For example, Coupang raised approximately 4 trillion won through an IPO in 2021, enabling significant improvements to its logistics infrastructure.

After listing, the company’s shares are freely traded on the open market, meaning the company’s value is evaluated in real-time by market participants. Simultaneously, listed companies are required to regularly disclose transparent financial information, which enhances trust among investors and customers.

The 6-Stage Mechanism of the IPO Process

Typically, a company must go through six stages to reach an IPO. Each stage is designed to protect investors and ensure market credibility.

Stage 1: Strategy Planning and Preparation

Companies aiming to go public first set clear objectives. They determine the amount of funds to raise, the number of shares to issue, and the appropriate timing for listing. At this stage, management comprehensively reviews current market conditions and the company’s financial status to make the final decision on whether to proceed with an IPO.

Stage 2: Selection of Underwriters

This stage involves choosing the investment bank to lead the IPO. Major global investment banks like Goldman Sachs or Morgan Stanley, or domestic firms such as Korea Investment & Securities or KB Securities, serve as underwriters. They manage the overall process, including company valuation, setting the offering price, investor recruitment, and marketing.

Stage 3: Disclosure and Price Determination

The company submits a preliminary review application to the Korea Exchange (KRX) and then files a securities registration statement with the Financial Supervisory Service. Simultaneously, it discloses financial statements, business models, and risk factors to investors. Through a demand forecast (Book Building) process targeting institutional investors, the final offering price is determined.

Stage 4: Subscription and Share Allocation

This is when individual and institutional investors apply for subscription to the new shares. The number of shares allocated depends on the subscription competition rate; high competition may result in some investors not receiving their desired amount. Some shares may also be allocated via lottery.

Stage 5: Commencement of Trading

Official trading on the stock exchange begins. The opening price on the first day is heavily influenced by market supply and demand and investor sentiment, and can significantly rise or fall compared to the offering price.

Stage 6: Post-Listing Price Fluctuations

After listing, the share price fluctuates over the long term based on actual company performance, industry outlook, macroeconomic conditions, and investor psychology. The decision of existing shareholders to sell or hold shares also plays a crucial role.

Opportunities for Both Companies and Investors: IPO

( Reasons for Companies Going Public

The primary purpose of an IPO is to raise large amounts of capital. Companies utilize the funds for business expansion, developing new technologies, or repaying debts.

IPO also provides an exit opportunity for early investors. Venture capitalists, private equity funds, founders, and employees holding stock options can cash out, creating a virtuous cycle in the early investment ecosystem.

Becoming a listed company automatically enhances creditworthiness. This perception arises from the obligation to disclose financial information regularly and the oversight by regulatory authorities. Such increased credibility strengthens competitiveness in global markets.

Finally, listed companies can attract and retain talented personnel through stock options. Many tech firms leverage this incentive structure to secure key talent over the long term.

) New Investment Opportunities for Investors

IPOs offer investors a chance to enter undervalued companies. Since initial offerings often price shares below the company’s true value, investors can expect significant gains through subsequent price increases.

For example, Tesla went public in 2010 at $17 per share, and as of 2024, the stock price, adjusted for stock splits, remains in the $400 range. Early investors realized returns exceeding 350 times their initial investment, exemplifying the potential of IPO investments.

IPOs also grant access to new industry sectors. Airbnb’s 2020 listing provided investment opportunities in the sharing economy industry, with the stock soaring 115% on the first day, reflecting high investor interest.

Since listed companies are required to disclose detailed financial information regularly, investors can more accurately assess their true value. Companies like Palantir, which combined a stable revenue model with increasing market demand, received positive evaluations post-IPO due to this transparency.

Furthermore, IPOs significantly enhance the liquidity of private shares. Trading in the open market makes it easier for more investors to invest in companies. Stable cash flows from listed firms also enable them to pay regular dividends, providing long-term returns to investors. Apple and Microsoft are prime examples of companies with stable dividend policies.

The Pros and Cons of IPO Investing: Advantages and Risks

Successful and Failed IPO Cases

( Cases of Explosive Stock Price Growth

Airbnb )2020 IPO(

Despite the challenging timing during the COVID-19 pandemic, Airbnb attracted high investor interest. The IPO was priced at $68, and on the first day, it closed at $146, a 115% increase, later surpassing $220 as the travel industry recovered.

Tesla )2010 IPO###

Starting at $17, Tesla’s stock has soared over 350 times, driven by growth in the electric vehicle market and continuous innovation. It is regarded as one of the most successful IPO stories.

Alibaba (2014 IPO)

Alibaba, a leading Chinese e-commerce company, listed on the NYSE at $68, closing its first day at $93, a 37% rise. Its market capitalization exceeded $200 billion, marking long-term success amid market growth.

Companies Facing Difficulties Post-IPO

WeWork (2019 IPO Cancellation)

Valued at over $47 billion, WeWork attempted to go public but lost investor confidence due to excessive spending and internal management issues. The IPO was canceled, and after a merger with a special purpose acquisition company (SPAC), continued management problems led to bankruptcy filing in 2023.

Roblox ###2021 IPO(

Initially listed at $45, Roblox rose to $77 but later declined over 50% due to increased competition and poor earnings performance.

K-Bank )2024 IPO Postponed(

Planned for 2024, K-Bank postponed its IPO due to low institutional investor interest and concerns over overvaluation. The offering price was lowered to the lower end of the desired range, and the IPO was delayed.

Characteristics and Investment Environment of IPO Markets by Region

) Korea’s IPO Market

Korea’s IPO market is rapidly growing, with increasing listings of innovative companies in fintech, biotech, and other sectors. Government support policies for startups, active venture capital investments, and increased liquidity in the KOSDAQ market are positive factors.

However, for foreign investors, entry procedures can be complex, and tax issues related to dividend income may arise. Careful analysis of local regulations and market trends is essential.

( US IPO Market

The US hosts the world’s most active IPO market, with NASDAQ and NYSE serving as primary platforms for global companies. Tech and biotech firms are especially prominent, with large unicorns like SpaceX and Stripe planning to go public.

While the US market offers high liquidity, it also features high volatility and intense competition. Strict regulations and disclosure requirements by the SEC can impose burdens on companies and investors, making thorough financial and industry analysis crucial.

) Hong Kong IPO Market

Hong Kong is a key financial hub for Chinese companies seeking overseas listings, with Alibaba and others actively listing. Its strengths include high liquidity and openness to international investors.

However, policy changes by the Chinese government and geopolitical risks are significant variables. Data regulations and political uncertainties can impact the market, and industry concentration may lead to greater impact during sector downturns. Careful monitoring of policy shifts and economic risks in China is necessary.

Practical Strategies for Successful IPO Investment

While IPO investments offer high return potential, they also carry substantial risks. Investors should conduct thorough analysis and adopt strategic approaches to improve success chances.

Key Analytical Factors

Financial Health Assessment

Careful analysis of the company’s financial statements is paramount. Focus on profitability, debt ratios, and cash flows. Companies with solid financials and growth potential are more likely to sustain stock price increases post-listing.

For example, Apple has maintained continuous growth since its 1980 IPO, supported by a robust financial structure and innovative product lineup. Microsoft, since its 1986 IPO, has also achieved sustained growth based on stable earnings and market dominance. These cases highlight the importance of strong financial fundamentals for long-term success.

Industry Outlook Analysis

The growth prospects of the industry in which the company operates are also critical. Companies in high-growth sectors like AI, cloud computing, and biotech tend to sustain growth after listing. Conversely, traditional retail or wired telecom industries with shrinking markets may face long-term stagnation.

Utilize research reports and data from market research firms to assess industry growth and competitive landscape.

Management Team Evaluation

The experience, leadership, and past performance of the management team significantly influence future growth. For startups and new companies, management capability can determine success or failure.

Review the IPO prospectus, management bios, LinkedIn profiles, and media reports to analyze previous corporate performance and leadership quality.

( Risk Management Strategies

Systematic Capital Planning

Funds allocated for IPO investment should be part of a diversified portfolio. Given the high return potential and risk of significant losses, pre-planning investment amounts and setting loss limits are essential.

Diversification

Rather than concentrating on a single IPO, spreading investments across multiple companies and sectors (technology, healthcare, finance) can minimize risks associated with sector downturns. Diversification enhances overall portfolio stability.

Market Environment Consideration

Economic conditions and investor sentiment at the time of IPO are crucial. During rising interest rates, growth stocks may decline, so market analysis is vital. Positive investor sentiment can lead to sharp IPO price increases, while unfavorable conditions increase risk.

Conclusion: Cautious Approach and Information-Based Investment

IPO investments present significant opportunities for both companies and investors. Companies can secure large capital and growth momentum, while investors can benefit from early price surges and long-term growth.

However, IPOs are characterized by high short-term price volatility and potential sharp declines depending on financial health and market conditions. Therefore, thorough analysis of financials, industry outlook, and management quality, along with diversification and prudent fund management, is essential to mitigate risks. Understanding regional market characteristics and regulatory environments is also critical.

Since IPO investing requires caution, consulting with financial experts or investment professionals is highly recommended. Developing strategies aligned with personal investment goals and risk tolerance can turn IPO investments into attractive long-term opportunities.