What Is an IPO?
In plain English
An Initial Public Offering (IPO) is the first sale of a company's stock to the general public. Through an IPO, a private company becomes publicly traded on a stock exchange, raising capital from investors while giving early shareholders and employees an opportunity to realize gains on their ownership stakes.
How Does the IPO Process Work?
A company hires investment banks as underwriters to set the offering price, file regulatory paperwork with the SEC, and market the IPO through a "roadshow." On listing day, shares begin trading on an exchange like the NYSE or Nasdaq. The opening price often differs from the offering price based on supply and demand.
Should Individual Investors Buy IPOs?
IPOs generate excitement, but they carry elevated risk. Shares can be volatile in the first weeks or months. Institutional investors often get preferential pricing, leaving retail buyers to purchase at inflated early-trading prices. Research suggests many IPOs underperform the broader market within their first year.
What Happens After an IPO?
After going public, the company must comply with SEC reporting requirements, including quarterly earnings and annual filings. Early investors and employees face a lock-up period (usually 90–180 days) before they can sell shares, which can cause a price drop when the lock-up expires.
Frequently asked questions
How can I invest in an IPO?
Most brokerages now offer IPO access to retail investors, though allocations are limited. You typically need to express interest before the listing date. Be aware that demand often exceeds supply, and you may receive fewer shares than requested.
What is an IPO lock-up period?
A lock-up period is a contractual restriction preventing insiders and early investors from selling shares for a set time after the IPO, usually 90 to 180 days. When the lock-up expires, a flood of new shares can temporarily depress the stock price.
Keep exploring
Related terms
Stock
A stock represents a share of ownership in a company. When you buy stock, you become a part-owner of that business and can benefit from its growth through price appreciation and dividends.
Nasdaq
The Nasdaq Composite is a stock market index of over 3,000 companies listed on the Nasdaq exchange, heavily weighted toward technology and growth stocks.
Market Capitalization
Market capitalization is the total market value of a company's outstanding shares. It is used to classify companies as large-cap, mid-cap, or small-cap and helps investors understand a company's relative size.
Volatility
Volatility measures how much and how quickly the price of an investment rises and falls over time. High volatility means larger price swings; low volatility means more stable, predictable price movements.
Growth Investing
Growth investing focuses on companies expected to grow revenues and earnings faster than the market average. Growth investors accept premium valuations in exchange for exposure to businesses with exceptional expansion potential.