What is an IPO? | The Opportunities and Risks Hidden Behind a Glamorous Debut

[Stock Basics] Mastering IPO (Initial Public Offering)

You often hear news like "A new stock is listing" or "Competition for public subscription is thousands to one." Many investors jump into the public offering market expecting a sharp price rise on the first day, the so-called 'Ttasang' (hitting the daily limit). However, not all IPOs result in successful investments. In this post, we will analyze the exact concept of IPO, why companies push for listing, and risk factors investors must beware of.

[Stock Basics] What is an IPO? | The Opportunities and Risks Hidden Behind a Glamorous Debut

1. Definition of IPO (Initial Public Offering)

IPO stands for 'Initial Public Offering'. This refers to the procedure where a private company, previously owned by a few shareholders, discloses its stocks to the general public and officially registers on the stock market (KOSPI, KOSDAQ, etc.).

Simply put, the status changes from a 'company only we knew and traded' to a 'company anyone can buy and sell'. Through this process, the company enters the market after undergoing rigorous screening and assumes the obligation to transparently disclose management details.

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2. Why Do Companies List?

The reasons why companies push for listing, even while enduring strict screening and disclosure obligations, can be summarized into two main points.

• Large-scale Fundraising: To grow, a company needs funds to build factories or develop new technologies. Funds raised through stock issuance become equity capital with no repayment obligation, making it the most effective means to secure financial 'ammunition' for a quantum jump.
• Capital Recovery (Exit) for Existing Investors: Venture Capital (VC) or Angel investors who funded the company from the risky early days sell their shares at the IPO timing to realize profits. In other words, listing is also a stage to share the fruits of the company's growth with early investors.

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3. Key Indicators Investors Should Watch

When investing in IPO companies, what you must watch most closely is the 'appropriateness of the offering price calculation'. Usually, companies calculate their value by comparing themselves with listed companies in the same industry (Peer Group). At this time, Price-to-Earnings Ratio (PER) or Price-to-Book Ratio (PBR) are mainly utilized.

Especially, the 'institutional demand forecast result' becomes an important hint. If institutional investors bid high prices and the ratio of 'Mandatory Holding Commitment (Lock-up)', meaning they won't sell shares for a certain period, is high, it is proof that the company's value is evaluated highly.

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4. Risks Behind the Glamour: Lock-up Release

Even if the stock price rises immediately after listing, you should not let your guard down. This is because once the previously mentioned Mandatory Holding Commitment (Lock-up) period ends, a volume of shares may flood the market.

This is called the 'Overhang' issue. It is frequent that stock prices plunge as volumes from major shareholders or institutions are released en masse at specific timings like 1 month, 3 months, or 6 months after listing. Therefore, when investing in public offerings or trading newly listed stocks, you must check the protective deposit release schedule.

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5. Conclusion: No Blind Investing

IPO provides wings of growth to companies and new profit opportunities to investors. However, you should avoid 'blind investment' believing only in the phrase 'Public Offering Invincibility'.

Behind a glamorous debut, the cold evaluation of the market always follows. Keep in mind that meticulously examining the company's business model, financial soundness, and Valuation is the first step to successful investment.

Key Summary:
IPO is a foothold for corporate growth and an investment opportunity, but risks such as protective deposit release (Overhang) and overvaluation controversy coexist. It is essential to check institutional demand forecast results and lock-up periods.

The content of this blog is only reference material for investment judgment, and investment decisions must be made under the individual's judgment and responsibility. Under no circumstances can the information in this blog be used as evidentiary material for legal responsibility regarding investment results.