What is an IPO (initial public offering)?
In one line: An IPO, or initial public offering, is when a private company sells its shares to the public for the first time and starts trading on a stock exchange.
A simple example with numbers
A company decides to go public. With help from banks, it sells 20 million new shares at $25 each. That raises 20 million × $25 = $500 million for the company.
Those shares go mostly to big investors at the offer price. Then the stock starts trading on the exchange, and anyone with a brokerage account can buy.
Why the first trade can look strange
The offer price ($25 here) is not the price most people pay. The first trade on the exchange is set by orders from buyers and sellers that morning. If demand is high, the stock might open at $35. If it's weak, it might open at $22.
That jump is a Gap: there's no price history before it. The first trade can come hours after the market opens while the exchange matches orders.
The steps, in order
- The company files a registration statement with the SEC (it's public on sec.gov).
- Banks gauge demand and set the offer price.
- Shares are sold to the first investors.
- The stock starts trading on an exchange like the NYSE or Nasdaq.
- A lock-up usually stops insiders from selling for a set time, often about 90 to 180 days.
When the lock-up ends, the Share float can grow a lot, as insiders become free to sell.
Why it matters
New stocks have no chart history, so there are no past turning points to mark. Early trading can swing hard, with wide spreads. Many traders wait until a few weeks of price action exist before treating the chart like any other.
A common mistake
Placing a Market order for the first trade. In a hot IPO, a market order can fill far above where the stock looked like it would open. A Limit order sets the most you'll pay.
Questions
Can regular people buy at the IPO price?
Sometimes. Some brokers offer small IPO allocations to customers, but most shares at the offer price go to large investors. Most people buy once trading starts.
Is a direct listing the same as an IPO?
No. In a direct listing, existing shares start trading without the company selling new shares through banks first.
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