IPOs
Learn how companies go public, how IPO pricing works, what happens on listing day, and what risks investors should understand.
What Is an IPO?
A Private Company Becomes Public
An initial public offering, or IPO, is the process of offering shares of a private company to public investors for the first time.
Private Company
Shares are not broadly traded on a public exchange.
IPO
Shares are offered to public investors.
Public Company
Shares can trade on a public stock exchange.
Why Companies Go Public
Public Markets Can Provide Access to Capital
Raise Capital
Companies can sell shares to raise money for growth, expansion, or other business needs.
Create Liquidity
Early investors and employees may eventually gain a way to sell shares.
Increase Visibility
Public companies can gain broader recognition and market access.
How an IPO Works
From Preparation to Public Trading
01
Preparation
The company prepares financial disclosures and works with advisors.
02
Valuation
The company and underwriters estimate an appropriate valuation range.
03
Pricing
An IPO offer price is set before public trading begins.
04
Listing
Shares begin trading on a public exchange.
IPO Pricing
Offer Price and Market Price Are Different
The IPO offer price is the price assigned before public trading. Once shares begin trading, supply and demand determine the market price.
IPO Offer Price
$20
Opening Trade
$26
Difference
+$6
Public investors may not always be able to buy shares at the original IPO offer price.
Listing Day
The First Trading Day Can Be Volatile
When public trading begins, buyers and sellers establish the first market prices. Heavy demand or limited supply can create large moves.
Strong Demand
The opening price may trade above the IPO offer price.
Weak Demand
The market price can fall toward or below the IPO offer price.
Lockup Periods
Some Insiders Cannot Sell Immediately
IPO lockup agreements can temporarily restrict founders, employees, and early investors from selling certain shares.
Before Expiration
Some insider shares remain restricted from sale.
Expiration
Restrictions on certain shares may end.
After Expiration
More shares can potentially enter the public market.
Lockup expiration does not guarantee selling, but it can increase the number of shares that are eligible to be sold.
IPO Risks
New Public Companies Can Carry Extra Uncertainty
Limited Public History
There may be less public trading history available for evaluation.
High Volatility
Prices can move sharply as the market searches for a fair value.
Valuation Uncertainty
Growth expectations can make valuation difficult to judge.
Early Selling Pressure
More shares may become available after restrictions expire.
Business Risk
Some newly public companies may still be unprofitable or rapidly changing.
Market Conditions
Broader market sentiment can strongly affect IPO performance.
Evaluating an IPO
Look Beyond the Listing-Day Excitement
Evaluating an IPO still requires understanding the underlying business.
Key Lesson
An IPO marks a company's transition to public ownership. The fact that a company is newly listed does not automatically make it a strong or weak investment—the business, valuation, risks, and financial condition still matter.