What Is an IPO? How Companies Go Public and Whether to Buy
6 min read Β· Updated September 4, 2026
An IPO, or initial public offering, is the moment a private company lists its shares on a stock exchange and sells them to outside investors for the first time. Before the IPO, founders, employees and venture capitalists owned it. After, anyone with a brokerage account can.
IPOs get enormous attention because they turn familiar names into tradeable tickers. They are also one of the riskiest ways to buy a stock.
Why companies go public
The obvious reason is money: an IPO can raise billions to fund growth or pay down debt. The second is liquidity: early investors and employees holding stock options finally get a way to sell.
Going public also brings obligations. The company must publish audited quarterly results, answer to shareholders and live with a daily verdict on its performance in the share price.
How the process works
The company hires investment banks as underwriters. They prepare a prospectus, the S-1 filing, which lays out the business, finances and risks. Then the roadshow: management pitches large institutions and the banks gauge demand.
The night before trading, the banks set the offering price and allocate shares, mostly to institutions. On the first day, the stock opens on the exchange at whatever price the open market sets, which can be far from the offering price.
The first-day pop
Many IPOs jump on day one. Underwriters tend to price slightly below expected demand so their institutional clients see an immediate gain. That pop goes to those allocated shares at the offering price, not to retail investors buying at the open.
The reverse also happens. Facebook fell below its IPO price for a year. Well-known names like Uber and Lyft traded below their offering price for long stretches.
Should you buy an IPO?
Studies of IPOs over decades show that, on average, they underperform the broader market over the three years after listing. First-day buyers pay for hype, and the lock-up expiry, when insiders are first allowed to sell around six months later, often pressures the price.
A reasonable approach is to wait. After a few quarterly reports, you can judge the business on published numbers instead of a roadshow story, and the price has usually settled.
Frequently asked questions
Can I buy shares at the IPO price?
Usually not. Most shares at the offering price go to institutional clients of the underwriters. Some brokers offer limited retail access, but most individuals buy after the stock opens for trading.
What is a lock-up period?
A period, typically 90 to 180 days after the IPO, during which insiders and early investors are barred from selling. When it expires, a wave of selling can push the price down.
What is a direct listing?
An alternative to a traditional IPO in which a company lists existing shares without raising new money or using underwriters to set a price. Spotify and Coinbase used it.
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