An IPO subscription runs in several stages. How shares are allocated, how the offer price is set, when lock-ups end, deposit timing and listing-day myths.
A company selling shares publicly for the first time is making an offering. It appoints underwriters and runs a bookbuilding process asking institutional investors how much they would buy and at what price. The offer price is set from those results, and retail subscription follows. By the time individuals apply, the price is already fixed.
Receiving everything you applied for is rare. Where demand is high, allocation is made proportionally, often combined with distributing a minimum quantity evenly. Committing a large amount can therefore return fewer shares than expected, and the unused portion of the deposit is refunded after allocation. Whether you may apply through several brokers at once varies by offering.
Offer prices are generally calculated by comparing metrics with similar listed companies, then applying a discount. Which companies were chosen for comparison and which metrics were used are stated in the prospectus. Reading the assumptions behind the price helps more than reading the price alone.
Some existing shareholders and institutions receive shares on a commitment not to sell for a set period. When that ends, the supply available to the market increases. The dates and amounts are disclosed and matter for understanding supply in the period after listing.
There is an impression that IPOs rise on listing day, but that is not always so, and opening below the offer price is not unusual. It varies with market conditions and the bookbuilding result. This explains the process and terminology; it neither recommends nor discourages subscribing to anything.
If you're considering an IPO subscription, open the registration statement and prospectus yourself. They are long, but you don't need to read everything; a few sections capture the essentials: how the company makes money and its recent results, the basis for the offer price and the comparable companies used, what the proceeds will be spent on, and the section on investment risks. The risk section is especially worth reading because it lists weaknesses the company itself discloses. Results of the institutional book-building and the share of lock-up commitments are also published, so check them before the subscription dates. In Korea, these documents are on the electronic disclosure system.
When you subscribe to an IPO, you must deposit a share of the subscription amount up front, and the remainder is refunded after allocation. With high demand, even a large deposit yields few shares, and most of it comes back a few days later. Your money is locked up in the meantime, so using funds you'll soon need for living costs or other purposes can cause trouble. Borrowing to fund the deposit adds interest costs on top of the risk of losses after listing. Note the subscription dates, refund date and listing date in your calendar, and make sure your account at the subscribing broker is ready in advance. Some offerings also charge a subscription fee.
Sorting out a few misconceptions makes decisions calmer. A high subscription ratio means strong interest, not a guaranteed post-listing price. Strong institutional book-building is likewise just information from the price-setting process. First-day price moves can be very large, and a stock that rises on day one can fall back below the offer price later. Supply can also increase around the dates when lock-up periods end. IPO shares are not loss-proof, and this guide explains the process without advising whether to subscribe.
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