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In the financial world there is such a thing as an IPO (i-pi-o). It is associated with the entry of new shares into the stock market. In this article we will talk about this procedure, tell you the pros and cons of going on the stock exchange, how it is done and what are the main goals of an IPO.

1. What is an IPO in simple words

IPO(i-pi-o, English "Initial Public Offering" - initial public offering) is the initial placement of a company's shares on the stock exchange. That is, after this, the shares become public (open) to everyone. It is impossible to conduct an IPO for a closed company

An IPO is carried out on the primary market, when shares are sold by the issuer company to other large funds (mutual fund, non-state pension fund), investors, and banks. The average investor does not have access to this market. After this, the purchased shares go to the stock exchange (secondary market), where anyone can buy them.

As a rule, the price for a primary placement is lower than for the opening of a secondary placement. This is being done so that the first IPO investors can make money, otherwise what would be the point for them to buy more expensively in order to set a lower price at the opening of trading.

After trading opens, the stock price may fall significantly after some time. But most often it happens like this: the rate rises for several days and then falls. This is due to a technical correction: many will simply want to fix their profits. Also, difficult times for shares come after 3 months, when the owners of the issuer company may also begin to sell their assets. Until this time, she is prohibited from doing this.

What happens if you hold the stock for a longer period? Statistics show that after six months, 30% of shares are below the offering price. Therefore, the chances of suffering losses are quite high.

As for the cost of accommodation. Many people are probably wondering: “Is it expensive or cheap to buy company shares on the first day of trading?” This question is impossible to answer. Even professional players are unlikely to know the exact answer to this question. It's all about the public's reaction. If there is mass demand, then naturally the shares will quickly go up from their starting point.

Plus, an important point is the time of placement of the stock on the stock exchange. If you are lucky and this is a moment of growth, then newcomers will most likely grow on the general wave of positivity. And if there is a flat or, even worse, a period of falling, then the chances of a growing trend are scanty.

In any case, I recommend that you first study the price behavior of dozens of IPOs on the first day of trading. This will help you navigate situations. I also advise trading only to mature traders. It will be difficult for beginners to make money from such volatility.

Watch also the video “what is an IPO”:

A company's IPO (from the English "Initial Public Offering" - first public sale) is a procedure for placing shares of a company that has not previously been public on the open market. Public companies are those whose shares are freely traded on the stock market and are available to an unlimited number of people.

IPO classification

In Russia, the concept of IPO often means a wide range of operations to place large blocks of shares on the market, among which are:

• PPO (Primary Public Offering) - primary public sale of shares of a new issue to an unlimited number of persons (classical understanding of IPO);
• private offering, placing - placement of shares in a narrow circle of professional investors;
• follow-on - additional placement of shares on the open market by an enterprise whose securities are already traded on the stock exchange;
• SPO (Secondary Public Offering) - secondary public sale of shares of existing shareholders to an unlimited number of persons;
• DPO (Direct Public Offering) - direct public offering (bypassing the exchange market) among individual investors.

IPO goals

What goals does a company pursue when planning an IPO?

• The main goal is to increase the liquidity of share capital, as well as the possibility of attracting long-term financial resources, which can be used to cover current costs, reduce the debt burden, modernize production, and implement large projects.
• Possibility of obtaining cheaper credit resources. A company that has entered into an IPO and has gone through numerous regulatory procedures for this purpose becomes documented more “transparent”. This gives potential lenders an accurate picture of her financial situation, which affects their willingness to lend at lower rates. Thus, going public can be seen as a strategic step in attracting new investors.
• An undoubted positive aspect of an IPO is that the company receives immunity from being taken over by raiders (it is much more expensive and difficult to “take over” a company that has entered into an IPO). And the “transparency” acquired during the IPO and the legislative procedures carried out will serve in the future as good protection against illegal actions of officials.

Speaking about a company's IPO, one cannot help but notice that this is not the cheapest method of attracting investments: to carry out such a procedure, the company needs not only to carry out serious organizational measures, but also to hire many specialists - lawyers, auditors, marketers, underwriters - and pay for them services. In addition, you need to keep in mind that approximately 5% of the proceeds are received by the IPO organizers for their work.

Considering the above, not all domestic companies decide to go public. This is more often done by enterprises that have a share of foreign capital: entering an IPO is a requirement of foreign shareholders, for whom this option brings additional profit and also makes it possible to diversify potential risks.

IPO procedure (stages)

An IPO is a multi-step process that can take years to complete. Moreover, each stage will require significant material investments. The process of their passage is influenced not only by the company’s internal processes, but also by the state of the state’s economy: with an unstable market situation, risks increase sharply, which negatively affects the expected level of capitalization.

In addition to shareholders and top managers of the issuing company, many other persons are involved in the IPO procedure: potential investors, platforms for placing shares (stock exchanges), legal, audit and tax consultants. If shares of the largest companies of strategic importance are put up for sale, government agencies are also involved in monitoring and supervising the IPO procedure.

In order for a company to enter an IPO as successfully and efficiently as possible, it must go through certain stages.

• Before the start of the procedure, in order to develop a strategic plan for further development, the company carries out a preliminary analysis of its financial condition and asset structure, the degree of its transparency and the level of flexibility of the management system are assessed.
• Based on the preliminary analysis data, the company decides to enter an IPO. From this very moment, work begins (often many years) to prepare for the upcoming changes, including the following main actions:
  1. The organizers of the IPO are selected and a team of participants is formed.
  2. A general strategy is developed, on the basis of which a business plan is written.
  3. The company's final readiness to enter an IPO is assessed. All financial statements are presented in accordance with international standards (GAAP, IAS). A search is underway for sources to increase the company's value, and in parallel, non-core assets are being sold.
  4. A due diligence procedure is carried out on the part of potential investors, external partners, and consultants.
  5. Marketing research is being carried out. Based on their results, advertising campaigns (road-shows) are launched, during which work is carried out with potential investors.
  6. A promising platform (exchange) is selected and the most favorable time to start selling shares on the public market is determined.
  7. Pre-registration is carried out on the stock exchange and with government agencies, the price range for the shares being sold is determined, a special document is issued - a preliminary prospectus, which displays detailed information about the issuer and the planned issue in the form prescribed by law. Shares are put into exchange circulation, data on price dynamics and trading volume are published.
  8. At the end of the IPO procedure, the results of the sale of shares are summed up and the results are published.
     A new stage of its financial activity has now opened for the company, which, first of all, is characterized by a desire to increase capitalization. However, it also has new responsibilities imposed by legal requirements on a public company. At the last stage, the work on finding and attracting large investors does not stop; all necessary reports are systematically published.

Over time, the company moves to organizing secondary circulation of shares, the purpose of which is to increase their liquidity, which makes the company more attractive to investors - after all, any investor prefers to invest money in assets that are easy to sell.

Choosing a site for an IPO

Separately, it is worth noting the importance of such a strategic task as choosing a site for the main listing, during which securities are included in the quotation list of the stock exchange. To do this, a check is made to ensure that the issuer and the securities it issues comply with the requirements of a specific site. A stock exchange may also have a multi-level listing, containing not one quotation list, but several.

When comparing stock exchanges, the terms of placement, associated costs, and the investor base are taken into account, and the territorial affiliation of the exchanges is also taken into account. When choosing an exchange, one cannot help but take into account the countries for which the products of the company entering the IPO are intended. In Russia there are such main exchanges as MICEX, RTS, St. Petersburg Exchange, and abroad - LSE, NYSE, NASDAQ.

In general, sales on Western stock markets are a more promising direction for conducting an IPO, since there is still a shortage of financial instruments on Russian ones, which reduces trading activity. Despite this, potential Russian issuers rarely use foreign sites for their first placement.

This situation arises mainly due to the high level of costs for a “foreign” IPO compared to Russian exchanges. However, the benefits of sales on Western sites, with the right approach, significantly exceed the costs, allowing you to attract a larger volume of investment. We must not forget about the sufficient stability of the Western stock market.

If we talk about conditions, then for domestic enterprises entering an IPO, the most profitable will be trading on the AIM and NASDAQ platforms - divisions of the LSE and NYSE, respectively. These exchanges are already successfully trading shares of some Russian enterprises in which foreign capital is present (for example, Golden Telecom), and are interested in long-term cooperation.

According to experts, now is not the right time to go public. But this information will certainly be useful for Belarusian businesses considering entering foreign sites in the future. Irina Glebovich, lawyer at the Zubr Capital management company, talks in detail about preparations for the IPO.

Belarusian companies, accustomed to receiving loans, issuing bonds or selling shares to a strategic investor, are still little familiar with such a financing instrument as an IPO. Isolated examples of businesses with Belarusian roots going to IPO (EPAM, ASBISc, Silvano Fashion Group (Milavitsa brand)) are reminiscent of the history of Hollywood stars. Let’s figure out what path lies ahead from dreams to reality.

What does an IPO provide besides attracting investment?

Obtaining the status of a company that is listed on a recognized market platform allows you to solve many problems. They are not limited to attracting investments for development:

What are the key criteria when entering an IPO?

The determining value for investors is the growth in the value of shares in the future. Therefore, the most attractive are companies that seek to spend raised funds on the implementation of an investment program.

If the goal of businesses is to pay off existing debts, this will cause justified mistrust.

When evaluating a company, investors analyze, first of all, its financial results (EBITDA growth, debt-to-equity ratio, ROE).

When investing in shares, quality characteristics are of great importance: a strong team, an established corporate governance system, brand reputation and product positioning in the market, and the level of innovation.

In general, a company entering the stock market must show that it is a promising business - have been operating successfully for at least 3 years and be able to generate a return on investment.

Pre-IPO period

A radical transformation of all business processes is the result of preparations for the IPO. Depending on how “raw” the company is, the period of its reliable reputation (business track record) can take six months, or it can last for several years.

It includes:

Improving corporate governance procedures. Creation of a Board of Directors and appointment of independent members, strengthening of internal control, development of high-quality internal reporting systems, development of a long-term incentive system for personnel (for example, option plans). It may be necessary to optimize the structure and introduce high standards of corporate culture.

Drawing up a clear development strategy, highlighting the most promising areas of business.

At the preparatory stage, the company should have a ready vision of the strategy for at least the next five years. Realistic estimates and forecasts were made.

Increasing financial indicators. A detailed analysis of the results of the issuer’s financial and economic activities will be disclosed in a special section of the share issue prospectus (MD&A).

Implementation of IFRS reporting and auditing. Most companies in our region that have gone public note that this is one of the most critical processes, disrupting the usual style of doing business. Businesses, as a rule, are satisfied with the use of IFRS and the consolidation of financial statements. This allows them to better evaluate financial results.

It is also important for the issuer to objectively assess the capabilities of its own management to create a public company and the cost recovery.

At the pre-IPO stage, costs can exceed $1-2 million. For some companies, increased costs at the preparatory stage result in a negative financial result. Example: in 2014, high costs for an IPO and the distraction of management from the operating activities of the Rocket Internet group (a German startup incubator) led to a loss of €20 million against a net profit of €174.2 million in 2013.

The company that successfully existed for about a year, observing the standards of “publicity”, can:

• Start selecting participants (organizers) for the placement
• Determine the conditions: assess your value, the volume of planned investments, the site where you plan to raise funds.

Serious investment bankers, financiers and lawyers have long staked out their place in the IPO services market. Most often, when placing internationally, issuers turn to a closed circle of investment banks, the Big Four audit firms, law firms of the Magic Circle level, etc.

After a tender is announced for a mandate to conduct an IPO, a team is selected with experience in placing similar companies in its portfolio, a significant pool of potential investors and experience in acceptable valuation of shares.

To be continued. In the following parts you will learn:

• IPO Cost Details
• How to choose exchanges and investors

We are starting to publish a series of educational materials about investments. The first one is about how to invest in an IPO. What is it and why the return on investment in an IPO is 11 times higher than dividends from shares of large companies, and 38 times higher than interest on a bank deposit.

• 1 year ago
• Investments

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When you have an amount that you want to save and increase, the first thing that comes to mind is to put the money in the bank. A bank deposit has low risk and low profitability. Average interest on deposits in dollars 1.5%.

Example

You have $10,000. You put it in the bank and after a year you get $10,150. Provided that the bank is reliable and fulfills its obligations, in a year your capital will increase by $150.

If the goal is not just not to lose money, but to invest in order to make money in the long term, you can buy shares on the stock exchange. The simplest thing is to invest in “blue chips”, shares of large companies with stable profitability indicators, for example, Apple, Amazon, Google.

Buying shares of large companies is a smart strategy: the long-term trend in the stock market is growing, so sooner or later most shares will show growth. But the dividends of such investments are modest 2-3% are considered a good indicator, and the investment horizon is extended sometimes you have to wait for more than one year for the rate to rise.

Example

Apple is the largest publicly traded company in the world. Recently it reached a capitalization of 1 trillion. $. Over the past year, Apple shares rose 46%, but this was the best result in 8 years since the current (longest in history) rally in the US market began in 2009. Those who managed to buy shares at the bottom of the crisis received a return of about 39% per annum, but those who bought at the peak before the 2008 crisis had to wait 2 years just to break even. The yield for the entire period was 29% per annum. Over the past 5 years, the yield is already only 19% per annum. Dividends now yield about 1.4%.

Thus, the outcome of an investment is highly dependent on the timing of entry into the market. For the greatest return, you need to buy shares during the period of highest volatility in the midst of a crisis, which not everyone will decide to do.

A more profitable and faster way to increase capital participation in an IPO. This type of investment is considered a little riskier than simply buying shares, but much more profitable. In most cases, shares on the stock exchange begin to trade significantly higher than the offering price, and the investor is in the black from the first day of trading.

Previously, private investors could not participate in IPOs, but today this is no longer the case. Investors with relatively small capital can buy shares of the most promising companies before they go public. Let's see how and how much you can earn from this.

IPO what is it

IPO is an Initial Public Offering, that is, an initial public offering of shares. This is a process during which a company offers to buy its shares to an unlimited number of investors, that is, it becomes public.

Goals

Raise capital

With an IPO, companies gain access to as many investors as possible around the world. At the same time, financing does not require repayment; the company does not borrow money, but receives it in exchange for a share in the business. It also becomes easier for public companies to obtain loans from banks, as reporting on financial indicators becomes open.

To get Mark

Stocks traded on a stock exchange provide the most accurate estimate of a company's value. Such a valuation can be used in negotiations for mergers and acquisitions, and the company may pay for the acquisition not with money, but with its own shares. The share price is used to evaluate the performance of top managers and stimulate them with option programs. Also, public status attracts more attention, increases fame and helps with marketing.

Lock in profits for early investors

Venture investors who specialize in investing in startups and finance a company in the early stages have the opportunity to “cash in” - take profits from their investments, sell part of the shares to new investors and invest money in other companies.

IPO procedure

Underwriters

The company hires underwriters - investment banks who put their money into the IPO process and "buy" the shares before they are finally listed on the stock exchange.

Application

Together with the underwriters, the company develops a prospectus form s-1, which indicates all the essential facts about its business: plans, purposes for using funds, financial statements for recent years, as well as possible risks for investors competition, influence of regulators, etc. When the form is ready, it is filed with the SEC (US Securities and Exchange Commission).

Roadshow

Next, the company holds a roadshow management travels around the world and makes presentations for potential investors: they talk about their business, prospects and placement conditions. Already during the roadshow, applications from investors begin to be collected - they inform how many shares they are willing to buy and at what price.

Entering the stock exchange

Immediately before the offering, the final share price is calculated and investors are told how many shares the company is willing to sell. Then trading begins and any private investor can buy any number of shares.

Benefit for investors

The company and underwriters value their reputation. They try to respect the interests of all parties: to attract the maximum amount of capital and give investors the opportunity to earn money. Therefore, the share price at the time of placement is usually set at a discount to the fair price. After the IPO, the price rises and the investor's earnings increase.

However, shares cannot be sold immediately after being listed on the stock exchange. A Lock up period is set - the time (usually 180 days) when the shares are “frozen”. After the Lock up period ends, the investor can sell the shares and get his money.

Minimum entry threshold

Underwriters only accept applications for very large amounts, so a private investor cannot participate in the IPO. For example, Goldman Sachs or Credit Suisse can provide access to an IPO with a deposit of $5 million or more, while the execution rate for new clients usually does not exceed 5%. However, some brokers collect a pool of investors and participate in the investment collectively.

A high threshold for entry into investment is both a limitation and an advantage. Due to the fact that not everyone can participate in the placement, when trading opens on the stock exchange, a huge number of people want to buy shares, which pushes the price up even more.

Limitations and risks

Exact price unknown

Before the IPO, the company publishes only the expected price range, which may change - usually not much. The exact placement price is unknown.

Possible price reduction

According to statistics, 70-80% of investments in IPOs bring a profit of about 60-70%, but the remaining part does not reach the offering price and brings losses (on average about 30%).

Although, by purchasing shares of public companies on the stock exchange, you cannot get a guarantee that even the largest of them will not show an unexpected and sharp decline. Recent example Facebook. The company, with a capitalization of over $600 billion, issued a negative report after the market closed on July 25, 2018. The next day, investors could only close positions 20% lower.

Partial execution of orders

In case of increased demand, orders are sometimes not fully fulfilled. If an investor applies for $5,000, then most likely he will receive shares worth $2,000-$4,000. The exact figure will be known only after the IPO.

How to invest

Choose a broker

First of all, you need to find a broker who provides the opportunity to participate in an IPO. Every year, about 250 companies go public on the stock exchange; brokers select the most promising ones and offer them to their clients.

Select a company

There are not many investment options left on the short list of a particular broker. Information about the company: analytics, investor opinions and prospectus can be found on the Internet.

Divide the total by 3

The investor must determine the amount he is willing to allocate for the IPO. To keep your money working, it is recommended to divide the total amount into 3 parts and apply for a new investment for a maximum of ⅓ of the total amount. Then, despite the fact that part of the money will be “frozen” during the Lock up period, the investor will be able to invest the rest in new ideas.

Apply for investment and track profits

After choosing a company to invest in, you can open an account and transfer money to the broker. The money will be credited to the account, and the broker will inform you about the progress of the transaction: the placement price on the exchange, the percentage of the application being satisfied and the exit price.

If you have left ⅔ of your investment money, then keep track of new investment ideas; there are usually no more than 1-2 of these per month. Diversification is the key to successful investing.

Example

July 16, 2018 United Traders has published a new investment idea Tenable IPO. This is an American company that develops cybersecurity software. The number of company clients grew over the year by 19%, and revenue by 51%. More than half of the Fortune 500 companies, including Amazon, Apple, JP Morgan, use Tenable products. At the same time, Tenable does not use borrowed funds, which indicates a very good financial position. Previous placements in the field of information security showed profitability from 23 to 140%, which also speaks for participation in the idea.

July 25 the last day for submitting an application for participation in an investment, that is, the investor has 10 days to make a decision. Let's assume the total investment amount is $15,000, then $5,000 (1/3 of the capital) is given to Tenable, $10,000 remains in the account for new ideas.

The company placed shares at $23. The demand for shares was quite high, so orders were filled by approximately 40%, that is, the investor received $2,001 worth of shares (approximately 87 shares), and the remaining $2,999 was returned to his account. He now has $12,999 in available funds.

26 July Trading of shares on the stock exchange began at a price of $33, that is, the paper profit was about 43% on the first day. The shares then fell slightly and are trading around $30, which is about 30% higher than the offering. Investors now have to wait 3 months to close their investment.

October 26 end date of the Lock up period. For its services, the broker usually charges a commission: about 3% for entry, 1.75% for exit and 20% of profits. If we assume that by the day the investment closes, the stock price will remain at the same level and the investment will be closed at $30, then the profit will be $2001 * 30.43% = $609. Subtract 20% commission on profits ($121.80), 3% on initial investment ($60.03), 1.75% on exit sales ($45.68) and get a net return of $381.49 on investment $2001. This is 19% of net investment income for 3 months and about 100% per annum, provided that profits are reinvested in new ideas.

Some time after listing on the stock exchange, options will appear on the market. Investors will be able to close a position without waiting for the end of the Lock Up period by paying a commission of about 10%. Then they do not take on the risk of a possible price drop, but the profit margin will be seriously reduced. According to statistics, it is better to wait for the standard period of 3 months and close the deal in the general manner.

Investments in IPO with United Traders

In 2017, United Traders participated in 11 IPOs. 8 out of 11 were successful. The most successful was Roku, whose shares we bought at $14 and sold at $54, which provided our clients with a profitability of 286% with 100% execution of the order.

Three investments, Blue Apron, Tintri and Qudian, closed in the red. But if you diversify your portfolio and invest in several IPOs in a row, you can minimize the risks.

The average annual return in dollars with reinvestment was 57%. Average profit per trade 34%.

As of mid-2018, United Traders had already participated in 17 IPOs, 14 of which were profitable. Zscaler and Zuora showed the highest returns of 155.5% and 95.7% respectively.

We publish current IPOs on, and also review companies going public on UT Magazine. Subscribe to the Telegram channel or to receive current investment ideas.