Understanding Initial Public Offerings: From Basic Concepts to Smart Investment Strategies

Initial Public Offering (IPO) is a crucial moment when a private company opens itself to the public by offering its shares for sale on the stock market. It is not just an ordinary financial transaction but a strategic step that transforms the company’s status and opens opportunities for exponential growth.

What Is an IPO and Going Public?

An IPO essentially is the process where a company issues new shares to the general public for the first time. Through this mechanism, new investors can invest their funds into the company, while the company gains access to significantly larger sources of funding.

It is important to understand that IPOs have very strict standards in many countries. The approval process is complex and requires compliance with various regulatory requirements set by securities authorities. Successfully completing this process indicates that the company has reached a certain level of success and credibility—an iconic milestone in the company’s journey.

After the share issuance is completed, the next step is going public, which is the process where the company’s shares begin trading openly on stock exchanges such as those in Shanghai and Shenzhen. While an IPO focuses on the initial sale of shares, going public is the phase where shares can be freely traded by anyone on the market.

Six Stages of IPO Implementation

The journey toward an IPO involves a series of structured and systematic stages. Here are the steps every company must go through:

Stage One: Initial Preparation and Formation of a Special Team

The company must form a dedicated team comprising executives, financial experts, legal consultants, and technical specialists. This team is responsible for coordinating the entire process. Additionally, the company needs to select professional intermediaries such as underwriters, accounting firms, and legal firms to provide consultation throughout the IPO process.

Stage Two: In-Depth Investigation and Improvement Guidance

Intermediary institutions conduct comprehensive investigations into the company’s financial, legal, and operational conditions. The goal is to ensure that all disclosed information is accurate, complete, and verifiable. Based on their findings, they provide recommendations for improvements to optimize the company’s governance structure.

Stage Three: Restructuring and Organizational Adjustment

If necessary, the company converts into a limited liability company and restructures assets to optimize the organizational structure according to capital market standards.

Stage Four: Document Preparation and Approval Process

The company and intermediaries prepare all registration materials in accordance with the Securities Commission’s requirements. These documents are then submitted through the underwriter. The Securities Commission conducts a thorough review and may provide feedback for refinement.

Stage Five: Roadshow and Price Setting

The company conducts presentations to potential investors (roadshow) to explain its vision, mission, and growth potential. Based on market response and economic conditions, the issuance price of shares is strategically determined.

Stage Six: Trading Launch on the Stock Exchange

Once the share issuance is complete, the shares are officially listed on the stock exchange and begin trading. From this point, the company must comply with all exchange regulations and undergo ongoing supervision by securities authorities.

Substantial Differences Between IPO and Going Public

Although these terms are often used interchangeably, an IPO and going public have different meanings and represent different phases in a company’s journey.

An IPO is a concrete process—selling initial shares to the public—while going public is the final status where shares can be traded freely. In other words, an IPO is a tool to achieve going public.

Participants in an IPO are generally limited to the issuer, underwriters, and selected institutional and retail investors. The focus is on raising funds and market recognition. Conversely, going public involves the entire market community with the goal of creating sustained liquidity and increasing the company’s market value.

The time dimension also differs significantly. An IPO is a relatively short process—from preparation to listing, usually taking several months. Going public, on the other hand, is an ongoing condition that requires long-term compliance with market regulations.

Valuation Methodologies in IPOs

Determining the fair value of a company is at the heart of every successful IPO. Accurate valuation ensures that the issuance price reflects the true value of the company, benefiting both the company and investors.

Price-to-Earnings (P/E) Ratio Model

This method compares the company’s P/E ratio with the industry average. If the company has better growth prospects than average, a higher ratio can be justified.

Price-to-Book (P/B) Ratio Model

This approach compares the market value with the company’s book value of assets. It is useful for companies with significant tangible assets such as manufacturing or real estate.

Discounted Cash Flow (DCF) Model

This comprehensive method projects the company’s future free cash flows and discounts them to determine the present value. It is especially useful for high-growth tech startups with negative profit margins.

In practice, underwriters use a combination of these models, considering factors such as the company’s competitive position, industry trends, management performance, and macroeconomic conditions. The valuation process requires deep professional expertise to ensure accuracy and fairness in pricing.

Opportunities and Risks for Companies Conducting an IPO

For companies, deciding to go public is a strategic decision with long-term consequences.

Advantages for the Company

First, the company gains access to much larger and cheaper funding sources compared to traditional financing. These funds can be used for expansion, R&D, or strategic acquisitions. Second, going public significantly enhances brand awareness and credibility—investors will view the company as having undergone rigorous scrutiny and being trustworthy.

Challenges to Overcome

However, an IPO also introduces new burdens. First, the company must comply with strict disclosure requirements and ongoing transparency obligations. Quarterly financial reports must be published, and material events must be disclosed—this increases administrative burdens and operational costs.

Second, ownership structure changes. With shares dispersed among many public shareholders, control by original owners is diluted. Careful planning is needed to maintain control through mechanisms such as preferred shares or voting agreements.

Third, the company faces higher market pressures. Every business decision will be scrutinized by investors, and quarterly performance will influence share prices. This requires operational discipline and more mature business strategies.

Investment Strategies to Leverage IPO Opportunities

For investors, IPOs offer unique opportunities but also entail certain risks.

Investment Opportunities

Investors who buy IPO shares at the issuance price have the potential for significant long-term gains. Newly public companies often have high growth potential and promising market prospects. Additionally, diversifying portfolios becomes easier by adding new IPO shares from different sectors.

Risks to Watch Out For

Price volatility is very high during the initial trading phase. Large fluctuations can occur in a short period due to limited float and speculation. Moreover, information about the new public company remains limited, creating information asymmetry between insiders and the public. Investors should conduct thorough due diligence before making investment decisions.

Recommended strategies include: (1) avoid buying during initial trading euphoria; (2) wait 3-6 months after IPO for volatility to subside and financial data to become more complete; (3) focus on business fundamentals rather than price momentum; (4) allocate only a small portion of the portfolio to IPOs due to high risk profiles.

Modern Trends and Regulations in the IPO Market

The IPO market continues to evolve with the transformation of the global economy.

Internationalization Trends

More local companies are choosing to list on global markets, not just domestically. This provides access to a broader investor base and potentially higher valuations. However, it also requires companies to understand and meet the regulations and investor expectations of different countries.

Impact of Technology and Innovation

Technology industries such as artificial intelligence, biotechnology, and renewable energy increasingly dominate global IPO markets. These companies, even if not yet profitable, can achieve high valuations due to exponential growth prospects. This shifts the traditional paradigm where profitability was a primary prerequisite.

Strengthening Regulations and Investor Protection

Securities regulators worldwide continue to enhance transparency standards and investor protections. This includes improved disclosure systems, complaint resolution mechanisms, and stricter sanctions for fraud. These changes make IPO markets safer but also more regulated and demanding.

Successful IPO execution requires perfect coordination among the company, intermediaries, regulators, and investors. Each party plays a critical role in ensuring market integrity and efficiency.

Case Study: Why Some Companies Reject IPOs

Interestingly, not all large companies choose to go public despite having the capacity. Huawei and Lao Gan Ma are classic examples of giants that consistently refuse IPOs.

Their reasons vary: some fear losing control and privacy, some dislike the strict regulations that come with being public, and others feel internal funding and bank loans suffice for expansion needs. This decision is not necessarily right or wrong—each company has unique calculations and strategic priorities.

Conversely, many firms plan their IPOs from inception, viewing it as a significant milestone in their business ecosystem.

Conclusion

An IPO is a powerful yet complex financial instrument. It can open extraordinary growth opportunities and wealth creation for investors but also entails substantial responsibilities and risks.

For companies, the decision to go public must be based on thorough calculations of long-term benefits versus costs. For investors, participating in IPOs should be approached with well-planned strategies and comprehensive due diligence.

Ultimately, an IPO is a double-edged sword—its success depends on thorough preparation, clear objectives, and professional execution by all involved parties.