What is a public offering? Meaning of IPO and essential things to understand before investing

Initial Public Offering (IPO) has long been one of the hottest topics in the stock market every year. However, many beginner investors start investing without fully understanding what IPO really means or how it works. An IPO (Initial Public Offering) is not just a simple stock transaction; it’s a key financial event where a company’s growth strategy and investor profit opportunities meet. This guide will cover everything from the core meaning of IPO to actual investment strategies.

What is an IPO? - Understanding the True Meaning of Going Public

IPO (Initial Public Offering) refers to the process where a private company first offers its shares to the general public for sale. Through this, the company can raise large amounts of capital, and investors gain the opportunity to invest in high-growth potential companies.

To deeply understand the meaning of IPO, it’s important to know its background. Early-stage startups or small and medium-sized enterprises often find it difficult to fund research and development, market expansion, or global entry solely through bank loans or venture capital investments. In such cases, going public via an IPO becomes a turning point that opens new capital doors for these companies.

The biggest difference between regular stock investing and IPO investing lies in timing and information. Stocks of already listed companies have accumulated years of public information and performance data, whereas IPO companies are about to enter the market, requiring more thorough analysis to evaluate their growth potential.

Making the IPO Meaning a Reality: The 6-Stage Listing System

Once you understand what going public means, let’s look at how it actually proceeds. IPOs generally follow a systematic 6-step process.

Step 1: Planning and Strategy Development

When a company decides to go public, it must first determine how much capital to raise and how to use it. Goals such as expanding R&D, entering global markets, or paying off existing debt are set. Then, a comprehensive assessment of current market conditions and the company’s financial health helps decide the timing of the listing.

Step 2: Selecting Underwriters

Global investment banks like Goldman Sachs and Morgan Stanley are influential underwriters in the IPO market. In Korea, firms like Korea Investment & Securities and KB Securities play this role. Underwriters do more than just brokerage; they evaluate company value, set the offering price, recruit institutional investors, and lead the entire IPO process.

Step 3: Transparent Disclosure and Price Setting

The company submits a preliminary review application to the Korea Exchange (KRX) and files a securities registration statement with the Financial Supervisory Service. This process involves detailed disclosure of financial statements, business models, and risk factors. Afterward, demand forecasts (book building) are conducted with institutional investors to gauge the market’s desired share price, leading to the final offering price.

Step 4: Subscription by Retail and Institutional Investors

At this stage, individual investors apply for IPO subscriptions. Popular IPOs can see subscription ratios of dozens of times, and in such cases, the allocation of shares is decided by lottery. Not all investors can get the desired amount.

Step 5: Official Trading and First-Day Volatility

On the listing day, trading officially begins on the stock exchange. The first-day price can significantly exceed or fall below the offering price, depending on market expectations. Some popular IPOs may surge over 100% initially.

Step 6: Long-term Post-Listing Price Fluctuations

After listing, stock prices fluctuate based on actual company performance, industry outlook, overall economic conditions, and the selling activities of early shareholders (lock-up releases). This stage largely determines the success or failure of IPO investments.

Why Do Investors Focus on IPOs?

Investors are interested in IPOs for several reasons. First, high initial returns are common; stock prices often rise sharply above the offering price at the start. Second, IPOs provide access to growth industries. For example, when Tesla went public in 2010 at $17, it introduced many investors to the electric vehicle sector.

For companies, IPOs are crucial for realizing growth. Just as Coupang raised about 4 trillion won in 2021 to expand logistics, IPOs act as catalysts for rapid growth. Being listed also obligates companies to disclose financials regularly, boosting credibility and global creditworthiness.

For early investors and executives, IPOs offer exit opportunities—selling their holdings to recover investments. Companies can also use stock options to attract talented employees, making IPOs a tool for talent acquisition.

The Reality of IPO Investing: Opportunities and Risks

While IPOs offer high profit potential, they also carry significant risks. Here’s what investors need to know:

Uncertain Returns

While initial surges are common, market conditions can cause prices to fall. If a company underperforms or industry conditions worsen, stock prices can plummet.

Lock-up Period Restrictions

Major shareholders and early investors cannot sell their shares for a certain period (usually 6 months) after listing, limiting market response to price declines.

Information Asymmetry

Before listing, company information is limited, making accurate valuation difficult. The disclosures in the prospectus may not reveal all risks.

Portfolio Diversification Opportunity

On the plus side, IPOs allow access to emerging industries and growth stocks, adding new tech companies to a traditional portfolio of large caps.

Relatively Low Entry Price

Most IPOs are priced below their expected post-listing average prices, so successful subscription often means entering at a relatively low price.

Lessons from Successful IPOs

Airbnb - 2020 Listing

Despite the COVID-19 pandemic, Airbnb’s IPO was priced at $68, closing its first day at $146, a 115% increase. The stock continued to rise above $220 as travel industry recovery gained momentum, reflecting high market confidence in its growth potential.

Tesla - Long-term Growth Since 2010

Tesla’s IPO at $17 has seen its stock price soar over the years, even after stock splits. Long-term investors who held since 2010 have gained hundreds of times their initial investment, exemplifying the power of holding quality companies over time.

Alibaba - 2014 NYSE Listing

Alibaba went public at $68, closing at $93 on the first day, a 37% rise. As China’s e-commerce sector grew, Alibaba’s valuation increased, now exceeding $200 billion.

Failures and Risks: Cautionary Cases

WeWork - 2019 Listing Collapse

WeWork’s valuation soared to over $47 billion, but due to transparency issues, excessive spending, and management problems, its IPO was canceled. It later went through a SPAC merger but filed for bankruptcy in 2023.

Roblox - Post-2021 Listing Decline

Roblox listed at $45, peaked at $77, but then declined due to increased competition and poor earnings, dropping over 50% from its IPO price.

K-Bank - Postponed Listing in 2024

K-Bank planned to list domestically in 2024 but postponed due to lack of investor interest and overvaluation concerns, highlighting the importance of market perception.

Global IPO Markets: Regional Investment Environments

Korean IPO Market

Active in fintech, biotech, semiconductors. Increased liquidity on KOSDAQ and government support boost listings. However, foreign investors face complex procedures and tax policies, requiring prior knowledge.

U.S. IPO Market

The world’s most active IPO market, with NASDAQ and NYSE hosting major global companies. High liquidity but strict SEC regulations and fierce competition.

Hong Kong IPO Market

A key platform for Chinese companies like Alibaba. Offers high liquidity and international investor access, but geopolitical risks and policy changes are factors to consider.

Practical Strategies for Profitable IPO Investment

Assess Financial Health

Analyze financial statements thoroughly—profitability, debt ratios, cash flow. Companies with solid financials, like Apple at IPO, tend to succeed long-term.

Industry Outlook

Growth industries such as AI, cloud computing, biotech tend to support company growth. Recognize whether a sector is emerging or mature.

Management Evaluation

Especially for startups, leadership quality is critical. Review executives’ backgrounds, past achievements, and media reputation.

Funding and Diversification

Limit IPO investments to a portion of your portfolio and diversify across multiple IPOs to reduce risk.

Market Environment

Interest rate cycles greatly influence growth stocks. Analyze current economic conditions and investor sentiment before investing.

Conclusion: Understanding IPO Properly for Smarter Investment

In summary, IPO is the process where a company first enters the public market, offering investors a chance to participate in growth. Companies raise capital, and investors seek high returns.

However, success is not guaranteed. While companies like Airbnb, Tesla, and Alibaba have delivered substantial gains, others like WeWork and Roblox have faced setbacks. The key lies in thorough analysis of financials, industry prospects, management, and market conditions.

The core of IPO investing is recognizing that risk and opportunity coexist. High returns can come with high risks. With careful research, diversification, and prudent timing, IPO investments can be a strategic way to grow your portfolio over the long term. Always consider expert advice and align your investments with your goals and risk tolerance before proceeding.