IPO and Public Offering Investment: Essential Information Beginners Must Not Miss

If you are considering investing in IPOs, you must first understand the exact meaning of IPO. IPO(Initial Public Offering, corporate public listing) is the process by which a private company first offers its shares to the general public. In simple terms, it’s the moment when a private company transitions into a public company. During this process, the company raises necessary funds, and investors get the opportunity to bet on a growing enterprise.

Why Are IPOs Popular: Investors’ Interests

The Temptation of High Initial Returns

Beyond the meaning of IPO, why are IPOs popular in actual investment practice? The main reason is the initial return. Many IPOs see a 50-100% or more increase over the offering price on the first day of listing.

Airbnb listed at $68 in 2020 and closed the first day at $146, a 115% increase. Tesla started at $17 in 2010 and is now around $400. Early investors have earned returns of over 350 times. These cases boost investors’ expectations for IPO investments.

New Industries, New Opportunities

Looking beyond the meaning of IPO and from an investment opportunity perspective, IPOs are a means to get early access to future industries. When promising companies in growth sectors like electric vehicles, AI, and biotech go public, investors can participate in the growth of these industries.

Alibaba went public in 2014 at $68 and rose 37% on the first day. It then recorded a market cap of over $200 billion, writing a growth story in China’s e-commerce market.

Transparent Information Disclosure

After listing, companies are required to regularly disclose financial information transparently. This allows investors to evaluate the true value of the company. It provides much more reliable information than stocks of private companies.

The Reality of IPO Investing: Not Everyone Succeeds

Cases of Failure

While high returns are possible, IPO investments are not without risks.

WeWork was valued at $47 billion in 2019 and prepared for an IPO but lost investor trust due to excessive spending and management issues. Ultimately, the IPO was canceled, and after restructuring, it filed for bankruptcy in 2023.

Roblox listed at $45 in 2021 and rose to $77. But due to intensified competition and poor performance, its stock has fallen more than 50% from the IPO price. K-Bank planned to go public in 2024 but postponed the listing after institutional investors showed little interest and the IPO price was not lowered.

Major Risks of IPOs

Price Volatility: In the early days of listing, stock prices are more influenced by investor expectations than actual company value. If expectations don’t match reality, prices can plummet.

Lock-up Period: Early investors and executives cannot sell their shares for 3-6 months after listing. If the stock price drops during this period, they may incur losses but cannot exit easily.

Company Performance: Even promising companies can see their stock decline if they do not grow as expected after listing.

Three Things to Check Before Investing in IPOs

1. The Company’s Financial Health

Examine profitability, debt ratios, and cash flow. Apple and Microsoft had solid financial structures from the start, which contributed to their long-term success.

Conversely, companies with large scale but no real profits, like WeWork, are more likely to lose investor trust.

2. Industry Growth Potential

Verify whether the industry the company belongs to is truly growing. Companies in growth sectors like AI, cloud computing, and biotech tend to see their stock prices rise even after IPO.

On the other hand, traditional retail or wired telecom industries may struggle to grow after listing.

3. Management’s Capabilities and Experience

The past performance, experience, and leadership of the management team determine the company’s future. Especially for startups, management capability is crucial. Carefully review the prospectus, management team’s backgrounds, and their achievements at previous companies.

Wise Fund Management Tips for IPO Investment

Diversify to Reduce Risks

Since IPO investments are highly volatile, it’s better to diversify across multiple IPOs rather than concentrating on a single stock. Investing in various industries like technology, healthcare, and finance can minimize losses from sector downturns.

Limit as Part of Overall Portfolio

It’s wise to restrict IPO investments to about 10-20% of your total assets. While high returns are possible, the risk of significant losses exists. Invest within a range you can afford to lose.

The Importance of Market Environment Analysis

During periods of rising interest rates, growth stocks tend to decline. When investor sentiment is weak, newly listed IPOs may not deliver high initial returns. Conversely, in a positive market environment, IPO stocks are more likely to rise.

Characteristics of IPO Markets by Region

South Korea Market

South Korea’s IPO market is growing around innovative companies like fintech and biotech. Government support for startups and increased venture capital investments promote this growth. However, foreign investors face entry barriers, so it’s important to understand local regulations and tax policies beforehand.

US Market

The NASDAQ and NYSE offer the world’s highest liquidity. Listings of tech and biotech firms are active, and large companies like SpaceX and Stripe are expected to go public. However, strict SEC regulations require thorough analysis of financial disclosures of listed companies.

Hong Kong Market

Hong Kong is a hub for Chinese companies’ overseas listings. It offers high liquidity and access to international investors. Still, it’s essential to monitor Chinese policy changes and geopolitical risks, and be cautious of over-concentration in certain industries(such as technology and finance).

Final Advice on IPO Investing

Understanding IPO as merely “listing” is insufficient; investors must recognize that it can be a double-edged sword for both companies and investors.

While the lure of high initial returns is real, there are failures like WeWork and Roblox. Therefore, thoroughly analyzing the company’s financials, industry outlook, and management capabilities before investing is essential. Diversification and prudent fund management are key to controlling risks.

Additionally, since regulations and characteristics differ across markets like Korea, the US, and Hong Kong, it’s crucial to carefully review the environment of the market you plan to invest in.

IPO investing can be a promising long-term opportunity, but it requires caution and expertise. Consulting with investment professionals to develop strategies aligned with your goals and risk tolerance is highly recommended. With proper information and approach, IPOs can be an excellent way to diversify your portfolio and foster growth.