Gongmoju Subscription: Applying for Korean IPO Shares

Imagine a famous bakery about to open a proper shop in a big department store. Before it does, it hands customers a special reservation ticket to buy its signature bread early at a fixed, friendly price.

Companies work the same way. When a private company enters an official stock market for the first time, such as Korea's KOSPI or KOSDAQ, that's called an initial public offering (IPO). To grow the business, the company gathers new investors. The process of openly recruiting shareholders from the general public is called gongmoju subscription.

If you take part, you can buy shares ahead of everyone else at a fixed price called the "offering price." If the company is very promising, its stock can jump sharply on the first day of trading on the regular market. Investors who received shares through the subscription can profit by that much.

For a popular IPO, far more people want shares than there are shares available. So shares are handed out by lottery or by set rules, and this is called "allocation." Right now in Korea, at least half of the retail investors' portion goes through equal allocation, and the rest goes through proportional allocation.

The first is equal allocation. You put in only the minimum subscription deposit (money that works like a down payment). Then every applicant, rich or small-time, gets the same 1/N share, or gets shares by lottery. Even students and people just starting their careers can join on fair terms.

The second is proportional allocation. Shares are divided in proportion to the subscription deposit you put into your brokerage account. The more money you put in, the more shares you can get. For a hot stock, you might have to deposit tens of millions of won (tens of thousands of dollars) just to receive one or two shares.

When you often see news about people earning tens of percent in a few days from IPO shares, it's easy to feel that IPO shares are a safe way to make money.

But subscribing is still stock investing. It's common for the price to plunge below the offering price on the first day of trading. If the offering price is set too high compared with the company's real value, or if the market mood is bad, a loss is almost certain.

That's why experts advise checking the "demand forecasting results" from professional institutions and the lock-up commitment ratio before you subscribe. A lock-up commitment is the share of stock that institutions promise to hold, without selling, for a set period after listing (anywhere from 15 days to 6 months). When this ratio is high, fewer shares flood the market right after listing, so the risk of a sharp drop is often seen as lower.