IPO: 5 Steps to Successful Stock Exchange Investing

Contents:

• What is an IPO: Key Aspects and Importance
• Why Do Companies Hold an IPO?
• IPO Stages: How Companies Go Public
• How to Participate in an IPO: A Complete Guide for Investors
• Buying Shares in an IPO: Is It Worth the Risk and How to Properly Value a Company
• What You Need to Know About an IPO: 4 Key Points
• How to Deepen Your Knowledge of Investing

What is an IPO: Key Aspects and Importance

An IPO, or initial public offering, is the process by which a company offers its shares to a wide audience of investors for the first time. This allows it to raise capital by listing on a stock exchange. The IPO process provides access to shares to everyone, making them available for purchase and investment. Thus, an IPO not only contributes to the growth of the company but also provides investors with the opportunity to participate in its development and profit from a possible increase in the value of the shares.

In an initial public offering (IPO), a company sets a price range for its shares and offers them at a certain price. After the IPO is completed, market participants are able to freely trade these securities, which can lead to a change in their price depending on supply and demand. It is important to keep in mind that stock prices can be influenced by a variety of external factors, including news about the company and changes in the economic situation. These fluctuations can significantly impact investment decisions and overall market trends.

The IPO (initial public offering) process is regulated by law, in particular Article 14 of Federal Law No. 39-FZ, which requires companies to register a prospectus for listing on the stock exchange. This requirement is aimed at ensuring transparency and protecting the interests of investors. In this article, we will take a detailed look at the key stages of an IPO, their features, and their importance for companies seeking to raise capital through the stock market.

Each stock exchange sets unique requirements for companies seeking to list. For example, the Moscow Exchange insists on full transparency from companies, which includes regular disclosure of financial data, such as quarterly reports and accounting statements that comply with both Russian accounting standards (RAS) and International Financial Reporting Standards (IFRS). For more detailed information on listing rules, we recommend reading the official documents posted on the exchange's website. It is important to remember that compliance with these requirements not only contributes to a successful listing but also strengthens investor confidence, which is critical for the further development of the business.

Why do companies hold an IPO?

The main goal of an initial public offering (IPO) is to raise capital to grow and develop a business. Funds raised through an IPO can be used to enter new markets, adapt to changing industry conditions, or merge with other companies. Conducting an IPO allows companies not only to increase financial resources but also to increase their recognition in the market, which in turn can help attract new customers and partners.

In addition to the financial benefits, an IPO provides companies with a number of additional opportunities. This event contributes to a significant increase in brand awareness, allows for the separation of the roles of management and owners, and strengthens the company's reputation as an employer. In some cases, an IPO gives senior shareholders the opportunity to partially exit the business by selling their shares on the open market. This not only improves the liquidity of investments, but also opens up new prospects for the growth and development of the company in a competitive market.

Owners and top managers retain control over the company even after an IPO. Typically, companies list only a portion of their shares, leaving controlling stakes with the owners. This ensures strategic independence and allows key decisions to be made without external pressure.

According to Boris Bogoutdinov, Managing Partner of the consulting company 2B Dialog and a PhD in Economics, the average volume of shares offered in an initial public offering (IPO) is 20-27% of a company's total capital. This figure can vary significantly depending on the economic sector. For example, in retail, companies typically sell from 10% to 39% of their shares, while in the pharmaceutical sector this volume can reach 10-50%. It is important to consider these factors when analyzing an IPO to assess investment opportunities and risks.

IPO Stages: How Companies Go Public

An initial public offering (IPO) is a complex and lengthy process that can take anywhere from several months to several years. This process involves various parties, including the issuing company, the stock exchange, the Central Bank of Russia, the National Settlement Depository (NSD), the National Clearing Center (NCC), and underwriters. Let's look at the key stages of an IPO in more detail.

At the initial stage, the company prepares the necessary documentation and conducts an internal audit. This is followed by the selection of underwriters, who will help determine the offering price and share volume. Following this, the regulatory approval process begins, which includes submitting the registration dossier to the Central Bank.

The next stage is a roadshow, during which the company presents its shares to potential investors. The final stage is the placement of shares on the stock exchange, which allows the company to attract investment and increase its capitalization. The IPO process requires careful preparation and compliance with all regulatory requirements, which ultimately affects the success of the placement.

At this stage, the company makes the decision to enter the stock exchange and begins the preparation process. A key aspect of this preparation is conducting an audit and optimizing internal processes. This is necessary to create a transparent corporate governance system that will be clear to potential investors. Several important documents are developed during the preparation process.

• A financial model to evaluate the business;
• A growth strategy that convinces investors of the company's reliability;
• A marketing strategy aimed at attracting attention to the IPO and ensuring high demand for shares.

According to the recommendations of the Moscow Exchange, marketing activities can begin before the official announcement of the company's intention to conduct an initial public offering (IPO). This allows for the preparation of the market and the creation of interest in the company's shares even before trading begins.

An underwriter is a specialized organization that plays a key role in the process of placing shares and preparing the company for an initial public offering (IPO). It conducts an in-depth assessment of the business's financial indicators, analyzes market demand for shares, and sets their optimal price. Underwriters can work both individually and as part of a consortium, which increases the effectiveness of the placement. Underwriters typically charge a commission for their services, amounting to approximately 6% of the total share offering amount. This approach guarantees the company professional support throughout all stages of the IPO and facilitates a successful entry into the stock market.

The securities prospectus is a fundamental document containing detailed information about the company required for registration with the Central Bank of Russia. In accordance with paragraph 22 of Article 39-FZ, the prospectus must include financial statements, the company's history, information about the major shareholders, and other relevant aspects. This information plays a vital role for investors and regulators, ensuring transparency and trust in the financial market. A well-written prospectus helps attract investment and strengthen a company's reputation.

The share prospectus is developed by the underwriter and approved by the company's board of directors. After this, it is registered with the Central Bank, which makes it possible to set the start date for trading on the stock exchange. This process is an important step in preparing for the public offering of shares, ensuring compliance with all necessary regulatory requirements and protecting the interests of investors.

The sale of shares begins before their official listing on the exchange. Several days or weeks before the initial public offering (IPO), brokers collect orders from investors interested in purchasing shares. These investors receive their shares immediately after they are listed on the exchange. Other buyers can begin trading shares only after the IPO is completed. This process is important for ensuring liquidity and stability in the market, allowing investors to express their intentions in advance and gain access to securities.

How to Participate in an IPO: A Complete Guide for Investors

Investing in an initial public offering (IPO) offers unique opportunities to acquire securities immediately after a company goes public. To participate in an IPO, investors must complete a few simple steps, starting with submitting an application to their broker. Information about IPO participation is typically available in brokerage mobile apps or personal accounts. Successful participation in an IPO can lead to significant profits, so it is important to stay up-to-date on current offerings and terms of the share offering.

The application process for participation in an IPO is quite simple and straightforward. The broker sets the minimum amount required for participation, which is usually 10,000 rubles. The investor determines the amount for which they wish to purchase shares and submits a corresponding application. The amount, including the broker's commission, is blocked in the brokerage account until the share placement process is completed. This allows the investor to be confident that the funds are ready to invest in the selected IPO.

Before going public, the company analyzes the demand for its shares and sets the offering price. This price is determined within a pre-announced range. If the number of applications for shares exceeds the available number, the price can be set at the upper limit of the range. Otherwise, the price may decrease, as happened with the Mosgorlombard IPO. Analyzing demand and setting the offering price are key stages in preparing for an IPO, allowing a company to optimize its financial results and attract investors.

On the day of the initial public offering (IPO), a blocked amount is debited from the investor's brokerage account, after which the purchased shares are credited to their account. The investor is then free to manage their shares, including selling or repurchasing them.

Not all brokers offer the opportunity to participate in IPOs. If you do not see a corresponding offer in your personal account, this may indicate that your broker does not accept applications for participation in initial public offerings. Make sure you choose a broker that offers access to IPOs to be able to invest in new companies at the launch stage.

When investing on the Moscow Exchange, it is important to consider the listing level of the shares. All investors can purchase shares of companies included in the first and second listing levels. However, access to third-level shares is limited. Purchase of third-level shares is available only to a select group of investors who must pass the appropriate testing or meet the criteria of a qualified investor. This division of listing levels helps protect less experienced investors and maintain market stability.

A broker may credit fewer shares for several reasons, one of which is when demand for shares exceeds the available supply. In such situations, the company may only partially satisfy client requests. For example, if you applied to purchase shares worth 500,000 rubles, you may only be credited with shares worth 250,000 rubles. The remainder of the funds will be returned to your brokerage account. This may occur due to a limited supply of shares on the market or high activity by other investors.

Buying Shares on an IPO: Is It Worth the Risk and How to Properly Value a Company

Buying shares during an initial public offering (IPO) can result in both profit and loss. The key factor affecting the future price of shares is the balance of supply and demand in the market. Forecasts cannot guarantee share price growth, as IPO results can vary significantly: some shares begin to rise after the offering, while others show a decline. It is important for investors to carefully analyze the market and consider potential risks before deciding to purchase shares during an IPO.

Let's examine two examples of initial public offerings (IPOs) to shed more light on this topic. An IPO is the process during which a private company offers its shares for sale to the general public for the first time. This step allows for the raising of capital for further development and increased liquidity. Considering specific IPO examples will help better understand the mechanisms and consequences of this financial instrument in the market context.

The first example is the IPO of Astra. On October 13, 2023, shares were placed at a price of 333 rubles per share. By June 16, 2024, their price had increased to 525 rubles, indicating a 57% increase. This growth in share prices demonstrates the company's success in the market and attracts the attention of investors willing to invest in promising assets.

The second example concerns the IPO of Element. On May 20, 2024, shares were offered at a price of 223.6 rubles per thousand shares, which corresponds to 0.2239 rubles per share. However, by June 16, 2024, the share price fell to 0.17808 rubles, a drop of more than 20%. This situation highlights the risks associated with investing in new companies at the initial public offering stage. Investors should carefully analyze the market and take into account possible share price fluctuations in order to make informed investment decisions.

Before deciding to buy shares at an IPO, it's essential to conduct a comprehensive analysis of the company. Boris Bogoutdinov, managing partner of the consulting firm 2B Dialog and a PhD in economics, advises focusing on key aspects. It's important to examine the company's financial performance, its business model, its competitiveness in the market, and its growth prospects. It's also important to consider the risks associated with the company's industry, as well as its reputation and management quality. A comprehensive approach to analysis will allow you to make an informed decision and minimize risks when investing in an IPO.

• Company financial statements.
• News and events related to the company and its industry.
• Presence of legal proceedings.
• The state of the stock market at the time of the IPO.

For analysis, it is worth using resources such as Spark, SBIS, Rusprofile, and Kontur.Fokus. It is important to remember that the timing of an IPO can significantly affect its success. For example, Uber experienced a 17% drop in value on the second day after the share placement, which was due to a negative market situation and pressure from regulators. Given these factors, it is necessary to carefully plan the timing of the market entry, as well as analyze the current economic and political conditions.

Making an informed decision to buy shares during an IPO requires a comprehensive analysis and a careful assessment of a number of factors. Investors should carefully examine a company's financial performance, business model, competitive position in the market, and growth forecasts. It is also important to consider market conditions and general economic trends. This approach will minimize risks and increase the chances of successful investment in shares at the initial public offering stage.

What you need to know about an IPO: 4 key points

• An IPO (Initial Public Offering) is the process of the first public sale of shares on the stock market. During an IPO, a company determines the price range at which its shares will be sold, and after this stage, investors are free to trade these securities, which can lead to either an increase or a decrease in their value.
• The main goal of an IPO for companies is to raise capital for further development and expansion of the business. For investors, this is an opportunity not only to support promising companies but also to potentially profit from rising share prices.
• To participate in an IPO, investors must submit an application to their broker indicating the amount they are willing to invest. This amount will be temporarily blocked in the brokerage account, and on the day of the IPO, the funds will be debited and the shares will be credited to the account.
• Investing in IPOs carries risks. The price of shares can fluctuate depending on supply and demand in the market, which means both the opportunity for profit and the risk of loss.

How to Deepen Your Investing Knowledge

• For beginning investors, it is important to understand stocks. We have extensive information on stocks and preferred shares, as well as advice on what to do if their value declines. Find out which stocks will be promising in 2024, based on expert opinions.
• On the Skillbox Media platform, you'll find a wealth of materials on various investment instruments. Explore bonds, options, and futures to expand your knowledge and understand how they operate in the market.
• If you're just starting your investing journey, check out our detailed guide for beginners. Here you'll find information on minimum starting amounts, the best investment options for beginners, and ways to avoid common mistakes.
• For practical experience, we recommend the Skillbox "Personal Investments" course, developed in partnership with the Moscow Exchange. In this course, you'll learn to assess risks and returns, analyze market indices and current news, and master the process of buying and selling securities. Each topic includes practical tasks, which allows you to consolidate the knowledge gained.