【summary】
IPO investment is an investment method in which you purchase the shares of a company that is going to be listed (Initial Public Offering) before it goes public, and aim to profit from the price increase after the company goes public. It is relatively popular in Japan and is seen as a type of "event investment" that is different from long-term investment.
However, not all IPOs go up. Popular projects are difficult to win, and there are also cases where the initial price is lower than the public offering price.
In this article, we will summarize the structure of IPO investment, its advantages and disadvantages, points that beginners should check, and the differences from IPO secondary investment. This is not a recommendation to apply for or buy or sell individual IPOs, but rather an investment education article to help you understand the structure and risks.
What is IPO investment?
There are various methods of stock investment.
Among them, the most popular are
IPO investment (initial public offering investment)
is.
An IPO is when an unlisted company is listed on a stock exchange for the first time, allowing general investors to buy and sell its shares.
In IPO investing, you acquire shares at the public offering price before listing, and aim for the initial price after listing and subsequent price increases.
However, IPO investing does not guarantee that you will make money if you hit the mark. The more popular the offer, the harder it is to win, and if the market environment is bad, the initial price may fall below the public offering price.
Basic flow of IPO
The flow of an IPO is roughly as follows.
企業が上場申請
↓
証券取引所・主幹事証券会社などが審査・準備
↓
証券会社が投資家を募集
↓
ブックビルディング（需要申告）
↓
公募価格の決定
↓
抽選・配分
↓
当選者が購入
↓
上場
↓
市場で売買開始In many cases, popular IPOs receive a large number of applications, so allocations to individual investors are made by lottery.
The lottery method, timing of funds restriction, and application procedure differ depending on the securities company, so it is necessary to check the rules of each securities company before actually applying.
Why IPO investment is profitable
IPO stocks do not have a fixed market evaluation immediately after being listed.
Therefore,
- Growth expectations
- Topic
- Rarity
- Compatibility with market themes
- Low public price
- Supply and demand at the time of listing
As a result, the initial price may significantly exceed the public offering price.
For example:
| Item | Price |
|---|---|
| Public offering price | 1,500 yen |
| Initial price | 2,400 yen |
| Difference | 900 yen |
100 shares will give you a profit of 90,000 yen before taxes and fees are considered.
This is why IPO investing is gaining popularity.
However, conversely, the initial price may be lower than the public offering price. While the expected value of IPO investment may seem high, it is an investment that varies greatly from case to case.
Advantages of IPO investment
The expected return upon winning may be large.
IPOs with high growth potential, small listing size, and popular themes can have an initial price significantly higher than the public offering price.
It is popular among individual investors because it can generate profits in a short period of time.
Can be purchased before listing
With IPO investing, you have the opportunity to buy at the public offering price before listing, rather than buying on the market after listing.
If the initial price exceeds the public offering price, the difference will be your profit.
Stronger event nature than normal individual stock analysis
IPO investing is more like event investing than long-term investing.
Rather than holding the stock for a long time every day and waiting for the company to grow, there is a strong tendency to aim for listing events and initial price formation.
Disadvantages of IPO investment
Popular projects are difficult to win
The biggest problem is that it's hard to win.
Applications are concentrated for popular IPOs, and the lottery ratio can be extremely high.
Therefore, the problem is that the higher the expected return, the more difficult it is to buy in the first place.
There is a risk that the public offer will fall short.
IPOs don't always go up.
If the market environment is poor, the listing is large, earnings growth is weak, or the public offering price is too high, a ``under-offering'' may occur, where the initial price is lower than the public offering price.
Fund efficiency may be poor
Some securities companies lock up funds at the time of application or purchase application in order to participate in the IPO lottery.
If you don't win, you won't make a profit. If you are unable to win even though your funds are tied up many times, the efficiency of your funds will be low.
Difficult to decide to sell
Should you sell it at the initial price or hold it even after listing?
It's not easy here either.
Although you may be able to lock in profits by selling at the initial price, it is also possible to sell a growing company too early. On the other hand, as a result of greedy holding, the value may drop significantly from the initial price.
Important checkpoints for IPO investment
Growth potential
Check whether sales and profits are increasing.
Even loss-making companies can go public. In that case, you need to look at the sales growth rate, the path to profitability, and the strength of the business model.
Listing size
In general, small-sized IPOs are seen as having a light supply-demand balance, and the initial price tends to rise.
| Size | Common characteristics |
|---|---|
| Small size | Light supply and demand, easy access to short-term funds |
| Medium size | Easy to see the balance between performance and theme |
| Large size | The initial price may be difficult to increase due to heavy supply and demand |
However, if it is small, it will not necessarily go up. The combination of performance, theme, public price, and sentiment are important.
Industry and theme
You can also see if the theme is popular in the market.
As an example,
- A.I.
- Semiconductor *SaaS
- Cloud *DX
- Universe
- Bio
and so on.
However, it is dangerous to judge based on theme alone. Even if the theme is popular, the initial price may not increase if the market capitalization is too high or the growth potential is weak.
Public price and preliminary conditions
It would also be helpful to know whether the public price was determined at the upper limit of the provisional conditions or whether demand was strong.
However, just because the upper limit is set does not mean it is safe. If the overall market is weak, initial prices may be difficult to increase even for popular deals.
Mistakes that beginners often make
I think you will definitely make money if you win.
IPOs have a public offering.
If you think that ``if you get an IPO, you win,'' you may end up losing money on unfavorable deals or large deals.
Judge only by popular themes
Themes such as AI-related, SaaS-related, and semiconductor-related tend to attract attention.
However, even if the theme is strong, if the public price or market capitalization is too high, it will be difficult to generate returns.
Applying to only one company and expecting too much
IPO investment is an investment with a low probability of winning.
It is more realistic to look at multiple securities companies and multiple deals and participate as much as you can within reason, rather than applying to just one company and feeling like you won't win.
Don't think about financial constraints
Funds may be required to participate in the draw.
You want to avoid using your living funds or money that you plan to use right away to apply for an IPO. IPO investment should be considered within your available funds.
Terms used in IPO investment
| Terminology | Meaning |
|---|---|
| Public offering price | Price at which investors purchase before listing |
| Initial price | First price established on the market after listing |
| Under public offering | The initial price is lower than the public offering price |
| Lead manager | Securities company primarily responsible for IPOs |
| Bookbuilding | Period for investors to declare demand |
| Preliminary conditions | Price range presented before deciding the public offering price |
| Lockup | Contract that prevents major shareholders from selling for a certain period of time |
For beginners, understanding this terminology will make it easier to read IPO articles and securities company screens.
Difference between IPO investment and IPO secondary investment
IPO investment and IPO secondary investment are quite different even though they are related to IPO.
| Item | IPO investment | IPO secondary investment |
|---|---|---|
| Purchase timing | Before listing | After listing |
| How to participate | Lottery/allocation | Normal market buying and selling |
| Main aim | Difference between public offering price and initial price | Price movement after listing |
| Difficulty | Difficult to win | Price movements are intense and difficult to judge |
| Risk | Under-offering | Capturing high prices and plummeting |
The biggest barrier to IPO investment is not winning.
The biggest barrier to IPO secondary investment is that ``anyone can buy, but price movements are wild.''
Both have their advantages and disadvantages.
Related article: What is IPO secondary investment? Investment method aiming at price movement after listing
How is IPO investment different from long-term investment?
| Item | IPO investment | Long-term investment |
|---|---|---|
| Holding period | Tends to be a few days to a few weeks | Several years to several decades |
| Source of profit | Initial price increase/event supply and demand | Corporate growth/dividend/compound interest |
| Analysis target | Supply and demand, popularity, public price, listing size | Performance, competitiveness, finance, management strength |
| Reproducibility | Large influence of winning luck and market conditions | Easy to systemize through accumulation and dispersion |
IPO investment is an event investment.
On the other hand, it is easier to create repeatability if the focus of asset formation is long-term, diversification, and accumulation.
It is safer to think of IPOs as an additional strategy to participate with surplus funds rather than as the mainstay of asset formation.
Practical advice for beginners
If you want to start investing in IPOs, the following ideas are realistic.
- Understand how IPO works
- Check the lottery rules of multiple securities companies
- Participate with spare funds rather than living expenses
- Understand the risk of underselling the public offering
- Decide in advance whether to sell at the initial price or continue holding
- Don’t make it the main focus of asset building
IPOs are easy to treat if you think of them as a "bonus" that accelerates asset formation.
I would be happy if I won. However, even if you don't win, your investment plan will not be ruined. This sense of distance is important.
summary
IPO investment is a popular investment method that involves acquiring shares before listing and aiming for a price increase after listing.
The appeal is that you can potentially get a high return if you win. On the other hand, the biggest hurdle is not being selected, and there is also the risk of not being selected.
Beginners will find it easier to tackle the game if they keep the following four things in mind.
- Understand how IPO works
- Check the lottery rules of multiple securities companies
- Recognize the risk of under-offering
- Think separately from long-term investment
IPOs are not get-rich-quick schemes. As an event investment that increases probability, it is important to use it within your available funds.
source
- Japan Exchange Group “[List of newly listed stocks (stocks)]” (https://www.jpx.co.jp/listing/stocks/new/index.html)
- Japan Exchange Group “Listed company information”
- J-FLEC “IPO｜Time to invest”
- Japan Securities Dealers Association “[Status of distribution of stock certificates to individual customers upon initial public offering]” (https://www.jsda.or.jp/shiryoshitsu/toukei/shinkikoukai/index.html)