Initial Public Offering (IPO): A Comprehensive Overview for Investors

An Initial Public Offering (IPO) is the process through which a company first offers its shares to the general public on the stock market. The goal of an IPO is to attract investment for business development, production expansion, or entry into new markets. For investors, this represents an opportunity to acquire stakes in a company at its early stages and potentially profit from its value growth following the public listing.

Today, IPOs remain one of the key events in financial markets, attracting the attention of both novice speculators and conservative investors: the former hope for a sharp price increase, while the latter view the new issuance as a means of diversifying their portfolios. In this article, we will examine the history of the primary issuance market, the stages of preparing a company for an IPO, the main advantages and risks for investors, methods for analyzing promising IPOs, and practical advice for those just beginning to explore this instrument.

The History of IPOs

The earliest prototypes of modern IPOs appeared in the early 17th century. In 1602, the Dutch East India Company issued shares through an open subscription in Amsterdam, effectively conducting the world's first public offering. This innovation allowed for the raising of significant capital (approximately 3.67 million guilders) for the development of trade in Eastern goods. Anyone could participate in the distribution of shares, leading to the creation of the first joint-stock company with the possibility of secondary share sales — a foundation for future stock market trading.

In the 18th and 19th centuries, the concept of public offerings became actively utilized in Europe and the United States. Industrial companies, railroads, and financial corporations required substantial funds for expansion. IPOs of well-known companies were held on the London Stock Exchange and the New York Stock Exchange (established in the late 18th century). By the 20th century, the practice of IPOs spread to all developed markets: corporations from various sectors (technology, industry, finance) regularly raised funds through primary issuances.

A particular boom in IPOs occurred at the end of the 1990s and the beginning of the 2000s, when numerous internet and technology companies went public. Some of these companies saw their stock prices soar (by dozens or even hundreds of percent), fueling investor interest in new issuances. Following the dot-com crash, demand for IPOs fell; however, with the advancement of new technologies and the emergence of startups, interest in primary placements resumed. Today, IPOs are practiced in many countries around the world — from developed economies to rapidly growing markets in Asia and Latin America.

IPOs in Russia

In Russia, the first attempts to create a stock market date back to the era of Peter I: in 1703, an exchange was established in St. Petersburg. However, actual trading in shares only began in the mid-19th century against the backdrop of the industrial revolution. During the Soviet period, the securities market was almost nonexistent, and after the collapse of the USSR in the 1990s, the revival of the stock market began. Some large Russian companies conducted IPOs on foreign exchanges (in the U.S. and Europe), attracting foreign capital.

The first IPO in the Russian market took place in 2002 when shares of a Russian company were first listed on the Moscow Exchange. From that moment until 2007, the Russian IPO market grew rapidly: dozens of new issuers emerged in various industries (energy, industry, technology, etc.). During this period, the mechanism of privatizing shares of state enterprises became one of the ways to expand the market, encouraging companies to go public.

After the global financial crisis of 2008, IPO activity in Russia sharply declined: in the subsequent decade, public offerings became rare. The market revival began only in recent years. For instance, in 2023–2024, the number of new listings on the Moscow Exchange reached record levels for Russian practice. Regulatory and exchange efforts to attract new issuers and expand investor access are also contributing to the revitalization of the primary placement market.

Stages of Company Preparation for an IPO

Going public is a complex and lengthy process. The main steps in preparing a company for an initial offering include:

Preliminary preparation. Management makes the decision to go public and conducts a thorough audit of the business: analyzing financial performance, asset structure, and corporate governance. The company transitions to international reporting standards (IFRS or GAAP) and optimizes business processes to be comprehensible to investors. During this stage, a growth strategy and financial model are formulated to assess future profitability.
Selection of underwriters and consultants. The company hires investment banks (underwriters), lawyers, and auditors to assist with the IPO process. Underwriters evaluate investor demand and help determine the estimated price range for the offering. Contracts are signed: in a firm commitment arrangement, the bank agrees to purchase the entire issuance, while the best efforts arrangement only involves organizing the sale of the maximum possible volume of shares.
Preparing the prospectus. The company, along with its underwriter and legal advisors, prepares a prospectus — a detailed informational memorandum. It discloses information about the company's activities, its financial history (usually for the last three years), plans, and risks. The prospectus is approved by the board of directors and registered with the regulatory authority (in Russia — the Bank of Russia).
Road-show and marketing. After the prospectus is published, the company conducts presentations for potential investors — a road-show. Management meets with large investors (funds, banks) to explain the business model and growth prospects. Marketing activities may also occur simultaneously: press releases, analytical reviews, and interviews with leadership to increase interest in the offering.
Pricing and share placement. Based on the received applications and consultations with the underwriter, the final placement price and issuance volume are established. The company typically announces the price range in advance; if demand is high (orders exceeding the issued shares), the price is set closer to the upper limit. Large investors (anchor investors) can reserve a significant portion of the offering, which boosts market confidence.
Listing and ongoing support. After the placement, shares begin trading on the selected exchange. The company continues to regularly publish financial reports and maintain open communications with investors. During the first months, a lock-up period applies — restrictions on share sales by insiders. Management's efforts to achieve financial goals and maintain reputation help stabilize the stock price.

Advantages and Risks of Investing

Advantages of IPOs for Investors

Potential for high returns. In the case of a successful offering, a company’s shares can significantly increase in value in the early stages of stock trading. Early investors often profit from the sudden market interest in new issuers.
Access to promising companies. An IPO allows investors to acquire a stake in a company during its formative years. Investors get the opportunity to participate in the development of an interesting or innovative business from the very beginning of its entry into the public market.
Increased liquidity and transparency. Following an IPO, shares of the company are traded on the exchange, which simplifies the buying and selling of securities. Issuers are required to disclose financial statements and development plans, providing investors with more information to make decisions.
Portfolio diversification. An offering allows investment in new sectors of the economy or foreign markets through overseas IPOs, thereby reducing overall portfolio risks.
Participation in a prestigious event. Successful involvement in an IPO can enhance the status of the investor, while the company gains greater visibility, indirectly affecting stock value in the future.

Risks of Investing in IPOs

Lack of history and predictability. New issuers often lack a long financial history, and their growth forecasts may not materialize. This increases uncertainty and complicates the assessment of the company's real value.
Price volatility. After an IPO, the price of shares can fluctuate significantly — both upward and downward. Following initial excitement, a correction may occur, particularly if demand quickly diminishes.
Overvaluation and market disappointment. Sometimes investor expectations are set too high: if a company does not meet predictions, stock prices may fall below the offering price. Historically, many IPOs have experienced significant losses in the first months.
Limitations for investors. Participation in certain offerings (especially of smaller companies) may require passing specific tests or holding qualified investor status. Not every private investor has the opportunity to purchase shares at the IPO stage.
Partial allocation and guarantees. If demand for purchases significantly exceeds the shares offered, an investor may receive fewer shares than planned. There is also no guarantee that a large underwriter will ensure the purchase of all securities (in a best efforts scheme, sales may be partial).
Liquidity risks. After an IPO, shares may trade with low volume, and prices may be sensitive to the buying or selling of even small batches of securities.

How to Evaluate the Potential of an IPO

Before investing, it is crucial to conduct your own analysis of the upcoming IPO. Here are the key aspects to consider:

Market conditions and industry trends. Examine the general state of the economy and the development of the sector in which the company operates. Market conditions can impact the success of an offering: during periods of growth, demand for IPOs is typically higher, while during crises, it is lower.
Business model and financial performance. Carefully read the prospectus: what products or services does the company offer, how does it generate revenue, and how steadily does its revenue and profit grow? Evaluate the dynamics of key indicators over several years, as well as levels of debt load and profitability.
Valuation based on multiples. Compare the valuation ratios (e.g., P/E, P/S, P/B) of the company with similar public firms. An excessively high multiple may indicate overvaluation, while a low one might suggest undervaluation or underlying issues.
Growth potential and competitive advantages. Analyze the development plans stated by management. Assess the target market size, prospects for business expansion, and the uniqueness of the company’s offerings. Innovations or monopolistic positions can enhance the likelihood of success.
Management quality and company history. Investigate the experience and reputation of executives and key stakeholders: how long has the company been in operation, and has it had success in past projects? A strong management team and stable corporate culture increase the chances of prosperous development post-IPO.
Use of funds from the IPO. Pay attention to how the raised funds are planned to be used: for expanding production, developing new products, retiring debts, or other purposes. A clear and convincing capital use plan indicates the company's serious intentions.
Demand and pricing of the offering. If there are preliminary applications, assess the level of oversubscription: high investor demand may push the price towards the upper limit of the range. Ensure that the company sets a reasonable price range aligned with actual demand.
Market entry conditions. Check which exchange and rules govern the IPO. Different trading venues (e.g., domestic or foreign) may have varying requirements and limitations for investors. Learn about the lock-up period and minimum lots to understand when and how many shares can be sold.

Practical Tips for Beginning Investors

For newcomers, participating in an IPO may seem appealing, but it's essential to exercise caution. Here are some practical recommendations:

Read the prospectus and study the company. Familiarize yourself with the official information: the issuer's business model, financial history, and capital raising goals. Knowledge of the details will help you objectively evaluate prospects and avoid unforeseen risks.
Invest prudently and diversify. Do not put all your money into one company at an IPO. Consider this investment as a small part of your portfolio. Spread risks by also investing in other instruments (stocks, funds, bonds).
Maintain a healthy skepticism. Be cautious with "hot" IPOs that attract a frenzy of interest. Do not believe promises of instant profits and thoroughly verify calculations and multiples. If something seems too good to be true, it likely has a catch.
Ensure accessibility of the offering through your broker. Not all brokers allow applications for participating in IPOs. Before opening a position, clarify how to place an order for new shares and what minimum investment amounts or restrictions exist.
Consider the duration and conditions of the transaction. Remember that investors' funds are locked until trading begins, and insiders may have restrictions on selling their shares (lock-up). Plan your investment for the desired horizon: short-term could involve high volatility.
Keep an eye on news and expert assessments. After a company goes public, continue to monitor its development and analysts' feedback. Ongoing information about performance results will help you make decisions regarding further purchases or sales of shares.

Examples of Successful and Unsuccessful IPOs

Successful example. Some companies have shown impressive growth post-IPO. For example, a tech sector organization may see its value increase by dozens of percent within the first months of going public due to strong demand. Early investors earn substantial profits: in several notable cases, shares appreciated 2-3 times within the first year post-issue. However, such results are more exceptions than rules.
Unsuccessful example. Conversely, there are many stories where the offering resulted in failure. During the “dot-com” boom of the late 1990s, many internet companies experienced sharp declines in price post-IPO: investors could not deliver on their expectations, and shares depreciated by significant percentages. Similar failures have also been observed later: shares of some companies fell post-trading and struggled to return to their offering price for a long time. These examples illustrate that participation in IPOs carries high risks.

An Initial Public Offering provides investors access to new promising companies during their development stage and can yield high returns in a rising market. On the other hand, participation in IPOs is always associated with risks: price volatility, uncertain prospects, and potential overvaluation. This makes thorough analysis of each issuer and a balanced approach to risk the key factors for investor success. For safe participation in IPOs, it is recommended to adhere to diversification rules, carefully study reports and forecasts, and not chase quick wealth.

In conclusion, IPOs remain a significant phenomenon in the financial market — both an opportunity for growth and a zone of increased danger. Equipped with the necessary knowledge and discipline, investors can utilize initial public offerings as a diversification tool for their portfolios. Understanding the history, stages, and risks of IPOs helps make informed decisions about investing in specific offerings. Always remember that all investments carry risks, making prudent caution and diversification reliable allies on the path to success.

Initial Public Offerings (IPO): A Comprehensive Overview for Investors