What is an IPO? Comprehensive guide to initial public offerings: processes, pricing and participation strategies

I. Introduction: what is an IPO?

IPO or initial public offer (Initial Public Offering) marks a turning point in the life of every company - the transition from private to public ownership. It's an event that attracts both large financial institutions and thousands of retail investors, offering a potential early entry an opportunity to become the next big success story. But the promise of quick returns is often accompanied by substantial risks.

IPOs are the bedrock of the financial world, allowing new ideas and business models to raise the capital they need to scale. At the same time, it has been seen that even companies with weak fundamentals can be overvalued in boom times. It is therefore essential for any successful investor to understand not only the definition of an IPO, but the complex process surrounding it: how the share price is determined, why volatility occurs and how participation in the Tallinn Stock Exchange differs from US listings. This guide gives you a comprehensive, unbiased and detailed overview.

II. The basic IPO process and the company's motivation

An IPO is a highly regulated and lengthy process, managed by the issuing bank (Underwriter).

2.1. Why do companies go IPO?

Motivation is never a one-off, but is made up of several strategic factors:

Raising capital (Primary Offer): The company sells new shares to raise large amounts of funds for growth, expansion, research and development or strategic acquisitions.
Creating liquidity (Secondary offering): Existing shareholders (venture capitalists, founders, early employees) sell their stake to realise their assets.
Strategic value: Public status improves a company's image, credibility, facilitates future borrowing and offers attractive financing opportunities. stock option programmes to attract workers. A public listing also provides a clear and objective value proposition for the company.

2.2. Critical phases of the IPO process

The IPO process starts with the selection of the issuing bank and ends with the debut of the share on the stock exchange.

Preparation and due diligence: The company and Underwriter carry out a thorough audit process. An important step is the drafting of the prospectus, which is. public and mandatory document, which includes financial statements, business plans, management information and all known risks. In the US, this document is S-1 filing, in Estonia and in Europe, it complies with EU regulations.
Roadshow: Management and Underwriter meet potential with institutional investors (pension funds, asset managers) to introduce the company and gather feedback on demand and price sensitivity. This phase is critical in determining pricing.
Evaluation and allocation: Underwriter sets the final price range and distributes the shares to investors. This is often the moment when the risk of over- or undervaluation.

III. Pricing: science, art and speculation

Setting the price of an IPO share is a complex financial engineering exercise aimed at finding the market equilibrium point.

3.1. Basic pricing methods

The choice of pricing is a strategic one and influences the ability of retail investors to participate:

Future price (Book Building, the US and Major Global Markets): The dominant method in the US and major European listings. Underwriter compiles a book of interested institutional investors, indicating at what price and how many shares they would be willing to buy. The final price will be set within the bidding range according to the demand collected. This method reduces Underwriter’risk and seeks to maximise the capital raised. But this often leaves retail investors out of the game.
Fixed price (e.g. Tallinn and Smaller European Markets): The price of the shares is fixed in advance in the prospectus and will not be changed. This method is Transparent for retail investors, and has spread to the Tallinn Stock Exchange, offering a more level playing field for all. However, with a fixed price, there is a risk that the share is either too cheap (Underpricing) or too expensive (Overpricing).
Auction method (e.g. Sweden): The price of a share is determined on the basis of the bids made during the bidding process, similar to a normal auction. This is less common in Europe.

3.2. Price anomalies: Underpricing and Overpricing

Underpricing: Share price is set too low, resulting in an IPO Pop (a rapid rise in the share price on the first day of trading). It is common (especially in the US) to create initial positive momentum. While the retail investor earns an immediate return, the company loses potential capital.
Overpricing: The price is set too high, so there is insufficient demand and the share falls below the offer price on the first day of trading. This is the hallmark of a failed IPO and damages the company's reputation.

IV. Investor participation: Tallinn vs. New York

Investor access to IPOs varies widely globally and depends on the stock exchange chosen.

4.1. Baltic and Estonian IPOs: proximity and sub-allocation

Tallinn Stock Exchange IPOs, which are mostly fixed-price and conducted through local banking groups, offer A rare advantage for European retail investors.

Access: Access is easy and direct through local brokers/banks. Often retail investors can get a sufficient allocation (allocation).
Advantage: Investors can often buy a share before large institutional funds, which is almost impossible in a global market.
Risk: Due to the small volume of the Baltic market, the shares listed liquidity often lower than that of US sharks. This can make it difficult to sell large positions at the desired price.

4.2. European and global IPOs

Major European centres (LSE, Frankfurt): Listings often use Book Building‘ut. Participation of retail investors is possible but often limited and requires specific international brokerage services. European markets offer a wide range of more mature industrial and financial companies with an emphasis on sustainability (ESG).
USA (NYSE, NASDAQ): A dominant market for technology and crypto companies. US IPOs are almost exclusively institutional focus. Retail investors (including Estonian investors) can access these shares mostly only after secondary market - st after the debut and often already IPO Popafter the -, at a higher price.
Asia (Hong Kong, India): Asian markets have been growing in recent years, especially in the consumer and fintech sectors. Listings in Hong Kong and India offer good access for retail investors under certain conditions, but often require local bank accounts.

4.3. Practical participation: How can a retail investor access?

Retail investors' access to the initial allocation of IPO shares is strictly linked to the contract between the issuing bank and the broker.

A. Estonian and Baltic markets (example: LHV, Swedbank)

In the local market, especially Nasdaq Tallinn, the situation is as follows favourable for retail investors.

Through banks: Large retail banks (e.g. LHV Bank, Swedbank) are often themselves in the IPO syndicate (or have contracts with them). This allows retail investors to submit purchase requests directly in the bank's self-service environment during the offering. You have every right to - this is the easiest way to get a share of the initial allocation in Estonia.
Important: Participation is subject to the dates and conditions set out in the prospectus.

B. Global markets (USA, LSE)

Global Book Building for retail investors (including in Estonia), direct participation is usually. impossible.

Institutional preference: The large investment banks (Goldman Sachs, Morgan Stanley) sell IPO shares almost exclusively to their largest institutional clients, and Private Wealth departments. Typical stock apps, such as Revolut or eToro, do not offer retail investors IPO allocation.
Exceptions for brokers (example: Interactive Brokers): Some international online brokers (e.g. Interactive Brokers) offer their retail customers access to. some Participation in a US or foreign IPO. This depends on their relationship with the issuing banks and is not guaranteed for all offerings. However, this is the exception rather than the rule and the quantities offered are limited.
Realistic participation: In most cases, the most realistic way for a retail investor to buy shares is to. secondary market - i.e. as soon as trading has started on the day of the IPO. However, this often means paying a higher price.

4.4. Summary of the participation strategy

In local IPOs, the investor should use local channels (LHV, Swedbank) to maximise the likelihood of getting an allocation. However, in the case of global IPOs, investors should check in advance whether a broker (e.g. Interactive Brokers) will offer a direct participation or prepare to buy shares on the market immediately after the debut, being aware of the following Pop-risk.

V. Pre-IPO, IPO and post-IPO life cycle

An IPO is a chain of events where knowledge of timing helps to hedge risks.

5.1. Quiet period and insider sales restrictions

Quiet period (Quiet Period): This regulation prohibits issuing banks and the company's management from publicly advertising the share or making supporting statements after the prospectus has been filed. This period ends about 40 days after the IPO, after which the banks start to publish their formal analytical assessments.

Sales restrictions: Throughout the whole process, the company's management and previous investors have been involved in. sales restrictions. They cannot sell their shares immediately on the market.

5.2 IPO day: the peak of volatility

On the day of the IPO, the first public trading of shares takes place.

Debut: Price volatility is often extreme. Underwriter is trying to keep the share price stable, but initial demand and the. hype can cause a sudden jump.
Pop: Successful IPOs open on the public market at a price higher than the offer price. This Pop is, however, mostly available to only a few insider-investors and makes it more costly for retail investors to buy at a later stage.

5.3. IPO Next period: Lock-up and stability

This is the most critical phase for the long-term investor:

A. Lock-up period (end of sales restrictions)

The most important time factor is lock-up period (usually 90-180 days). This is the time when insider’itel (founders, VCs, early employees) are not allowed to sell their shares. When this period ends, a large number of new shares often fall on the market, putting downward pressure on the price due to the realisation of profits by earlier investors. This is a well known event that often causes a short term sell-off. price pressure and share price depreciation. A long-term investor should prefer to buy either before the IPO (e.g. Tallinn Stock Exchange) or after the IPO. lock-up period’at the end of the period when the price has stabilised.

B. Due Diligence and long-term strategy

Successful investment in IPOs requires due diligence’i, which goes beyond media hype’is:

Critique of the assessment: Is the value of the company realistic compared to similar, already listed competitors? Avoid companies whose price requires unrealistically fast growth.
The path to profitability: In the new economic environment (expectations of lower growth and higher interest rates by 2026), investors prefer companies that have a clear path to profitability or are already profitable.
Purpose of use: What does the company use the capital raised for? Is it to invest in growth or to cover old debts?

VI. Summary and investor practice

IPO is high on financial markets at risk, but a potentially high-yield event. It requires thorough preparation, especially in terms of pricing and market dynamics. Baltic listings offer the retail investor better access to an initial allocation, while US markets require patience and a wait-and-see approach. lock-up period’i end.

Do not invest hype’i, invest in business. Long-term success is achieved through realistic expectations, regular due diligence’and awareness lock-up period’the risks associated with.