Increasingly, Baltic companies are also opting for listing their shares on the stock market through an initial public offering (IPO). This method allows the company to raise additional capital and offers interested parties the opportunity to purchase shares in the company. What do you need to know about IPOs and how to participate?
The reasons why a company decides to list its shares (PDF) publicly or on the stock exchange can range from raising additional capital and strengthening its capital base to improving its reputation and the willingness to issue employee shares.
In recent years, several well-known Baltic companies have joined the Nasdaq Baltic IPO, such as fuel trader Virši, one of Estonia’s largest real estate developers, Hepsor, Latvian provider of financial services DelfinGroup, and several others. It is to be expected that we will hear more and more of such events in the future.
Is an IPO a good way to invest?
To prepare for an IPO, a company must do proper homework, including setting an initial price at which investors can buy shares of the company. In the long run, once a company is successfully listed on the stock market, it may turn out that the initial share price offered was relatively advantageous. Namely, lower than the current share price. Therefore, in some cases, an IPO can be a profitable form of investment.
However, one should be aware that any type of investment involves risks. Participating in an IPO is often riskier than investing in other companies that have been listed on the stock exchange for a long time. Because publicly traded companies traditionally operate in secrecy and do not regularly report quarterly results and future plans, prospective investors have much less information on which to base their decision.
According to Forbes, IPOs can sometimes be more successful and sometimes less. For example, shared-driving company Lyft conducted an IPO in March 2019, offering one share for USD 78.29. As the IPO got underway, the company's stock price fell sharply, hovering around USD 21 a year later. Conversely, exercise bike company Peleton has been listed since September 2019, when it offered investors a share for USD 25.24. Although the value of the stock fell in the first few months due to the Covid 19 pandemic, the distance training offered by Peleton quickly soared in popularity – in February 2021, the price of a share of the company was USD 154.67.
Investors should also be aware that stocks have long been a volatile financial instrument, meaning that price changes can be quite significant even in the short term. When market demand or supply changes, stock prices can change in a very short period of time. However, over the long term, shares generally perform better than other assets such as bonds.
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One should also consider risk diversification, i.e., try to build up an investment portfolio that is as diversified as possible and not invest all the money in the shares of one or a few companies.
How to participate in an IPO?
Companies announce their plans to conduct an IPO and name the banks that will offer interested parties the opportunity to purchase shares. The IPOs are organised for a certain period of time, which means that an order to buy shares must be submitted by a certain date.
If the IPO is offered by SEB banka, to buy shares you need to open an investment account and then a securities account.
