Initial Public Offering (IPO) Investment: You Must Know This First to Succeed

Initial Public Offerings (IPOs) are investment products that attract the interest of many investors, but few truly understand how they work. An IPO (Initial Public Offering) is not just about “new stocks being issued”; it is a significant event that can alter a company’s growth trajectory and an investor’s portfolio.

Why You Need to Understand IPOs Properly Before Investing

From an investor’s perspective, IPOs are important because entering the market at an undervalued price early on can lead to substantial profits as the company grows. Tesla started with an IPO price of $17 in 2010, and its current stock price is several tens of times higher. Airbnb’s IPO in 2020 was priced at $68, and on its first day, it surged to $146, later surpassing $220.

However, not all IPOs succeed. WeWork, valued at $47 billion, attempted to go public but failed due to a lack of investor confidence, ultimately filing for bankruptcy in 2023. Roblox’s stock price has fallen more than 50% compared to its IPO price.

In these critical moments, what should investors do? The answer is to analyze the company thoroughly.

IPOs from the Company’s Perspective

Let’s understand the reasons why companies choose to go public.

First, capital raising is the core reason. Coupang raised about 4 trillion won through its IPO in 2021, using the funds to significantly expand its logistics and delivery systems. This has become the foundation of Coupang’s competitiveness today.

Second, building trust. Public companies are required to disclose financial information transparently on a regular basis, which fosters trust among investors and customers. Their position in the global market is also automatically strengthened.

Third, realizing early investors’ profits. Venture capitalists and early investors can sell their shares in the market to recover their investments. Founders and employees also exercise stock options to gain substantial profits.

Fourth, talent acquisition strategy. Listed companies can offer stock options to employees, helping attract and retain top talent continuously.

How Does an IPO Proceed?

Typically, an IPO involves the following steps:

Step 1: Strategy Planning
The company decides when and how much capital to raise, carefully reviewing current market conditions and its financial status.

Step 2: Underwriter Selection
Global investment banks like Goldman Sachs and Morgan Stanley, or domestic securities firms such as Korea Investment & Securities and KB Securities, act as underwriters. They evaluate the company’s value, set the offering price, conduct marketing, and attract institutional investors.

Step 3: Disclosure and Price Setting
The company submits a preliminary review application to the Korea Exchange and a securities registration statement to the Financial Supervisory Service. It discloses financial statements and business models to investors, conducts a demand survey(with institutional investors), and determines the IPO price.

Step 4: Subscription and Allocation
General and institutional investors apply for the IPO. If demand exceeds supply, allocations may be reduced or distributed via lottery.

Step 5: Trading Commences
Official trading begins on the stock exchange. On the first day, the stock price can surge or fall sharply depending on market expectations.

Step 6: Long-term Price Fluctuations
After listing, stock prices fluctuate over the long term based on company performance, industry outlook, and market sentiment.

The Pros and Cons of IPO Investing

IPO investing offers both opportunities and risks.

Success and Failure Cases

Successful IPOs:

• Tesla(2010): Started at $17, now around $400, yielding over 350 times return for early investors
• Airbnb(2020): IPO at $68, first-day surge to $146(+115%), later surpassing $220
• Alibaba(2014): IPO at $68, first-day rise to $93(+37%), market cap exceeding $200 billion

Failed IPOs:

• WeWork(2019): Withdrew plans, filed for bankruptcy in 2023
• Roblox(2021): IPO at $45, down more than 50% from IPO price
• K-Bank(2024): Postponed listing due to lack of institutional investor interest

Understanding Market Characteristics

IPO markets differ by country.

Korea:
Active listings in fintech, biotech, and other innovative sectors. Government support for startups and increased venture capital investment are positive factors. However, foreign investors should consider complex procedures and tax policies.

USA:
Nasdaq and NYSE host many global companies. High liquidity is an advantage, but volatility is also high. Companies must meet strict SEC regulations and disclosure requirements.

Hong Kong:
Platform for Chinese companies to list abroad. High liquidity is beneficial, but policy changes by the Chinese government and geopolitical risks are key variables.

Strategies for Successful IPO Investment

1. Analyze the company’s financial health
Focus on profitability, debt ratios, and cash flow. Financially stable companies are more likely to sustain growth post-IPO. For example, Apple and Microsoft demonstrate that solid financial foundations are crucial for long-term success.

2. Review industry outlook
Target companies in high-growth sectors(AI, cloud computing, biotech). Conversely, companies in declining industries like traditional retail or wired telecom may face stagnation.

3. Evaluate management capabilities
Assess the experience, leadership, and past performance of executives. Especially in startups, management quality can determine success or failure. Review prospectuses, career backgrounds, and media reports.

4. Diversify investments
Avoid over-concentrating on a single IPO; instead, diversify across industries to minimize risks from sector downturns.

5. Consider market conditions
During rising interest rates, growth stocks may decline. When investor sentiment is positive, IPOs tend to surge; in negative markets, risks increase.

Conclusion: Prudence Is the Best Investment Strategy

IPOs offer important opportunities for both companies and investors. Companies can raise large capital and accelerate growth, while investors can seek high returns.

However, they also carry high volatility and risks. Before investing, always verify:

• Is the company’s financial condition solid?
• Does the industry have genuine growth potential?
• Does management have the capacity to realize the vision?
• Is the current market environment favorable for new listings?

Careful analysis and risk management are essential for long-term success in IPO investing. Establish strategies aligned with your investment goals and risk tolerance, and consider consulting professionals if needed.