What is IPO?
In short
A company's first sale of shares to the public, listing it on an exchange.
Also known as: initial public offering
An IPO (initial public offering) is a private company's first sale of shares to the general public, listing it on an exchange. Until then the owners are founders, employees and venture investors; after the IPO any investor can buy the stock through a broker.
How it works
- The company files a registration statement (S-1) with the SEC, publicly disclosing its business, financials and risks.
- Investment banks (underwriters) gauge demand from large investors and set the offering price.
- Shares are first allocated at that price, mostly to institutional investors, and then free trading begins on the exchange.
A retail investor usually buys not at the IPO price but at the first-day opening price on the exchange, which can be far above it. In the first days there is little price history and volatility is high.
The lock-up period matters too: typically for 90–180 days after the IPO insiders cannot sell. When it ends, a lot of stock can hit the market and pressure the price. An alternative route to listing is a SPAC.
At the IPO the company sold 20M new shares at $25 and raised $500M. The founders kept the same number of shares, but their stake fell from 62.5% to 50% — that is dilution.
Example
Illustrative numbers: a company sells 10 million shares at $20 and raises $200 million.
- On day one the stock opens at $30 (+50%) and closes at $26 (+30%).
- An investor buys 100 shares at the open: 100 × $30 = $3,000.
- Six months later, after the lock-up ends, the price falls to $18: 100 × $18 = $1,800.
- Result: −$1,200, or −40%. An institution that got shares at the IPO price is only −10% ($20 → $18).
Takeaway: "making money on IPOs" often applies to those who got the offering price, not to those who bought at the first-day open.
Mistakes and tips
Don't chase first-day hype with a market order — the opening price can land in a very wide range. If you do buy, use a limit order.
Know the lock-up expiry date in advance: selling pressure can increase around it.
Read the 'Risk factors' section of the S-1 — it lists the risks the company itself admits to.
A new stock has a short history, so size smaller and set your stop-loss in advance.
Frequently asked questions
- How can I buy a stock at its IPO?
- Shares at the offering price go mainly to institutional investors. A regular investor usually buys through a broker once trading starts, at the market price; some brokers offer limited IPO access.
- Do stocks always go up after an IPO?
- No. Many IPOs rise on day one, but plenty later trade below the offering price. The outcome depends on the business and the price paid.
- What is an IPO lock-up period?
- A period after the IPO (typically 90–180 days) during which founders and insiders cannot sell. Selling can pick up when it ends.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
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