IPO Stocks Explained: What They Are and the 6-Step Listing Process (How to Make Money)

In this post, we'll look at what IPO stocks are and walk through the listing process that brings them onto the stock market. We'll also cover strategies for making money by investing in IPO stocks.

What Are IPO Stocks?

In the stock market, a public offering (公募) is the process of openly recruiting buyers for newly issued securities such as stocks and bonds.

IPO stocks are the shares sold through this public offering process.

Companies want to recruit investors openly through a public offering. This lets them attract more investment and raise their profile.

The IPO Listing Process

The IPO subscription that most of us are familiar with is the final step before a stock is listed on the market. Usually, when a new company lists on the stock market for the first time, it has to go through the following 6 steps.

• Step 1: Selecting a lead underwriter

A company that wants to go public works with one of the securities firms to carry out the listing process. Because the lead underwriter also benefits when the listing succeeds, several securities firms will compete to become the lead underwriter when the company is a good one.

• Step 2: Due diligence and internal review

Once the lead underwriter is selected, the company that wants to list carries out its own due diligence and internal review. This helps prevent problems that could arise later. It includes setting up an employee stock ownership association, preparing the application for preliminary review, and getting the supporting documents ready.

• Step 3: Preliminary listing review

The preliminary listing review is the stage a company must pass at the stock exchange in order to go public. Only after passing it can the company move on to the full listing procedure.

• Step 4: Filing the securities registration statement

After passing the preliminary review, the company must prepare a securities registration statement and disclose its internal information to everyone through the electronic disclosure system (DART). This includes its business overview, financial condition, governance structure, and more.

• Step 5: Investor relations (IR) sessions and book-building

Once the company has passed the review and finished submitting its documents, it moves on to the "public offering" stage, where it issues new shares and sells them publicly. These new shares are called "IPO stocks."

The price of IPO stocks isn't the price actually traded on the stock market; it's set by the offering price. The initial benchmark is determined by the company and its lead underwriter proposing a desired offering price range (band).

The IPO price band is then adjusted based on demand from institutional investors, including securities firms, insurance companies, and pension funds. If many want to buy, the offering price is set high; if not many want to buy, the offering price is set low.

• Step 6: Subscription and listing

The final step is running the public offering and subscription for the general public. IPO subscriptions are usually handled by the lead underwriter that managed the IPO process and by the securities firms that underwrite the shares. Before subscribing, it's a good idea to check carefully how many shares are allocated to each firm.

The usual way to subscribe to an IPO is to deposit a subscription margin, then buy and be allocated shares at the offering price in proportion to your share of the total. The amount for the allocated shares is then deducted from your margin, and the rest is refunded. IPO subscribers can make a profit by selling the shares on the market after the listing.

How to Make Money Investing in IPO Stocks

Successful IPO investing takes thorough research and careful judgment. Here's how to make money successfully with IPO stocks.

1. Review the securities registration statement

Newly listing companies are required to disclose all important internal information in a "securities registration statement."

Investors who want to take part in an IPO should read the securities registration statement and evaluate the company's market environment, outlook, and key issues as a whole. You can find the securities registration statement on the Financial Supervisory Service's electronic disclosure system (DART).

2. Institutional book-building

Institutional investors are among the big players in IPOs. A good IPO will draw many institutional investors, pushing up the competition ratio.

Before taking part in an IPO, it's a good idea to check the book-building demand for that IPO through news articles and disclosures. Institutional book-building usually closes about a week before the offering, so you can use it to gauge how the stock's price might move after listing.

3. Understand the IPO allocation policy

If you plan to invest in an IPO, it helps to understand its allocation policy, meaning how the shares will be distributed. Some IPOs may be allocated mainly to institutional investors, which can leave individual investors with only a very small number of shares.

4. Take profits after listing

IPO stocks often show sharp volatility after listing, with prices rising or falling significantly. So you should prepare a strategy to read market conditions and timing carefully and take profits at the right moment without getting greedy.

Wrapping Up

An IPO is the public shareholder recruitment procedure a new company carries out when it wants to list on the stock market. A listing company must pass the stock exchange's review.

It's important for IPO investors to do enough research, assess their own investment goals and risk tolerance, and make sound investment decisions.