Initial Public OfferingIPO
An initial public offering is when a company first sells shares to the public and lists on a stock exchange. Underwriting banks help set the price, which is why first-day trading can open far above or below the offer price.
An IPO is the moment a private company becomes public: it sells shares to investors and starts trading on an exchange. IPOs attract attention because early trading can be dramatic, with prices jumping or slumping on the first day. They also come with specific risks: little trading history, heavy promotion and insiders who may sell later. This entry explains how IPOs work, how they are priced, and what to watch as a trader.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- Going public, Flotation, Listing
- Updated
An IPO in plain words
A company decides to raise money from the public.1 Investment banks help it set a price, sell shares to investors, and list them on an exchange. From then on, anyone can trade them. See Exchange.
The price set before trading is the offer price. The first trade on the exchange can be very different, depending on demand. See Volatility.
How an IPO works, step by step
Preparation
The company hires banks and publishes a prospectus describing the business and risks.2
Roadshow
Management presents to investors to gauge demand.
Pricing
The offer price is set, usually the evening before trading.
Allocation
Shares go mostly to institutions; individuals often get few or none.
First trade
The stock opens on the exchange at a market-set price.
Lock-up expiry
Months later, insiders are allowed to sell, which can add supply.3
Worked examples
Example 1 — The first-day pop
PopOffer price $20. Heavy demand: the stock opens at $32.
| Investors allocated at $20 | +60% at the open |
| Buyers at the open | Pay $32 |
Most of the first-day gain goes to those who received shares at the offer price.
Example 2 — Chasing the open
ChaseA trader buys at the $32 open. Over six months the stock drifts to $24.
| Result | −25% |
Excitement on day one does not guarantee later gains. Many IPOs trade below early highs.
Example 3 — Lock-up expiry
SupplyInsiders hold 60% of the shares, locked up for 180 days. As the date nears, the stock weakens.
| Potential new supply | Large |
Know the lock-up date before holding a recent IPO.
Ways to go public
| Aspect | How it works | Main difference |
|---|---|---|
| Traditional IPO | Banks underwrite and price new shares | Raises capital; price set in advance |
| Direct listing | Existing shares start trading | No new capital usually. See Direct Listing |
| SPAC merger | Merges with a listed shell company | Different process and incentives. See SPAC |
| Secondary offering | A listed company sells more shares | Not a first listing |
Why traders watch IPOs
Volatility
New listings can move sharply in early sessions.
Sector signals
Strong IPO demand can signal risk appetite.
Index inclusion
Large new listings may later join indices.
Event dates
First earnings and lock-up expiries are catalysts. See Earnings.
Advantages and disadvantages
Advantages
- Early access to companies newly available to the public.
- Detailed prospectus with business and risk information.
- Strong demand can create large early moves.
Disadvantages
- Little price history for analysis.
- Small allocations for individuals at the offer price.
- High volatility and heavy promotion.
- Lock-up expiries can pressure the price.
Going deeper
Read as far as you need. Each level builds on the one before it.
Read the prospectus
Beginner
The prospectus lists risk factors, how the money will be used, and who owns what after the IPO. It is the most important document.
Float size
Intermediate
When only a small share of the company is offered, the tradable supply (float) is small, which can make early trading very volatile.
Underpricing
Advanced
Studies have long found that IPOs are on average priced below their first-day close, while long-run returns of IPOs have often been weak. Averages hide wide variation.
Common mistakes
Buying the hype at the open
Wait for price action and information.
Ignoring lock-ups
Mark the expiry date.
Skipping the prospectus
Read the risk factors.
Oversizing
New listings are volatile; size accordingly. See Position Sizing.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- An IPO is a company’s first sale of shares to the public.
- Banks set an offer price; trading can open far away from it.
- Individuals often buy at the open, not at the offer.
- Early trading is volatile with little history.
- Watch lock-up expiries and first earnings.
Frequently asked questions
Can I buy shares at the IPO price?
Why do IPO prices jump on the first day?
Are IPOs good investments?
Further learning
- Exchange
Where IPO shares start trading.
- Market Capitalisation
How the new company is valued.
- Volatility
What to expect in early trading.
- Fundamental Analysis
Judging the business behind the listing.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Initial Public Offering (IPO) (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Updated Investor Bulletin: Investing in an IPO (opens in a new tab) Checked .
- Investor.gov (SEC). Initial Public Offerings: Lockup Agreements (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.