Glossary
Initial public offering (IPO)
The first sale of a private company's shares to the public, after which they trade on a stock exchange.
On this page
An initial public offering is the first time a private company sells shares to the public. The company raises money by issuing new shares, early owners may sell some of theirs, and from the first trading day the stock is listed on an exchange where anyone with a brokerage account can buy it. An IPO also brings permanent obligations: quarterly reports, audited financials and public scrutiny.
How an IPO works
The company hires investment banks as underwriters. In the US it files a registration statement (usually Form S-1) with the SEC describing the business, risks and finances. Bankers and management then run a roadshow to pitch large investors and collect indications of interest, a process called bookbuilding. The night before trading, the company and underwriters set the offer price and allocate shares, mostly to institutions.
What to watch for
Retail investors usually buy at the opening market price, not the offer price, so the pop goes to those who received allocations. Early owners and employees are typically bound by a lockup of around 180 days; its expiry can bring a wave of selling. Newly public companies have short trading histories, and the prospectus is the best source for their risks.