Do you know exactly what IPO means? Many people often hear the word IPO in the stock market, but surprisingly few truly understand what an IPO is. An IPO is the process of a company first offering its shares to the general public, and this marks an important turning point for both the company and investors beyond just raising funds.

The reasons companies choose an IPO are clear. They aim to secure large-scale capital. Just like Coupang raised about 4 trillion won in 2021, through an IPO, a company can raise funds needed for research and development, market expansion, debt repayment, and more all at once. At the same time, going public enhances the company's credibility and provides early investors and management with an opportunity to cash out their investments. It also means venture capitalists and employees’ stock options can be converted into cash.

From an investor’s perspective, the meaning of an IPO changes. In the early days of listing, the stock price is likely undervalued, allowing early investors to realize significant profits. When Tesla went public at $17 in 2010, early investors saw their investments grow over 350 times, with current stock prices around $400. Airbnb also went public at $68 in 2020, surged 115% on its first day to $146, and later rose to $220.

However, not all IPOs are successful. WeWork, for example, was valued at over $47 billion in 2019 and pushed for an IPO, but due to excessive spending and management issues, it lost investor trust and ultimately filed for bankruptcy in 2023. Roblox went public at $45 in 2021, rose to $77, but due to increased competition and poor performance, its stock fell more than 50% from the offering price.

To understand the meaning of IPO, you also need to know the process. When a company decides to go public, it first selects an investment bank as the lead underwriter. These banks evaluate the company’s value and set the offering price. Next, the company discloses financial statements and business models, and conducts demand forecasts to finalize the IPO price. During the subscription phase, both retail and institutional investors apply, and the number of shares allocated depends on the demand. Popular IPOs often have very high subscription rates, making it difficult to get the desired amount of shares.

On the first day of listing, the stock price can surge or fall sharply depending on market expectations. After listing, the stock price fluctuates long-term based on company performance, industry outlook, and market sentiment. Some companies, like Alibaba, listed at $68 in 2014 and surpassed a $200 billion market cap, while others fail to meet initial expectations.

Looking at the practical pros and cons of IPO investing, the advantages include initial profitability, growth potential, increased liquidity, and transparent information access. The disadvantages include high price volatility, lock-up periods (initial investors cannot sell for a certain period), lack of information before listing, and uncertainties in emerging industries.

Investors who truly understand what IPO means should consider these points. First, analyze the financial health of the company carefully. Look at profitability, debt ratios, and cash flow to assess long-term growth potential. Companies like Apple and Microsoft succeeded long-term because of their solid financial structures.

Second, analyze industry prospects. Companies in growth sectors like AI, cloud computing, and biotech are more likely to continue rising after IPO. Conversely, companies in traditional retail or wired telecom industries, where markets are shrinking, should be approached with caution.

Third, evaluate the management team’s capabilities. Review the prospectus, management backgrounds, and media reports to verify their experience and past performance.

Finally, managing your funds is crucial. Limit your IPO investments to a portion of your overall portfolio and diversify across multiple IPOs. Be especially cautious during periods of rising interest rates or negative market sentiment.

The characteristics of IPO markets differ across Korea, the US, and Hong Kong. Korea is attracting attention for fintech and biotech firms, but foreign investors face entry barriers. The US markets, NASDAQ and NYSE, are the most active globally with high liquidity. Hong Kong serves as an overseas listing hub for Chinese companies, but policy changes and geopolitical risks should be considered.

By fully understanding what IPO means and approaching investments with thorough analysis of financials, industry outlook, and management, along with diversification and risk management strategies, you can seize high-profit opportunities. While IPOs can be highly volatile in the short term, with proper information and strategy, they can become promising long-term investment opportunities.