IPOS & GOING PUBLIC
Plain English
An IPO (Initial Public Offering) is when a private company sells shares to the public for the first time. It's the company's debut on the stock market. Some IPOs skyrocket on day one; others flop. They're exciting but often risky.
Going deeper
In an IPO, a private company hires investment banks (underwriters) to help set a price range, market the offering (roadshow), and sell shares to institutional investors. On the first trading day, shares become available to the public. The IPO price is set by the underwriters; the opening price on the exchange may be significantly higher (or lower) due to demand. Lock-up periods (typically 90-180 days) prevent insiders from selling immediately after the IPO. SPACs (Special Purpose Acquisition Companies) and Direct Listings are alternative paths to going public. Most financial advisors recommend waiting 6-12 months before buying IPO stocks.
Examples
Hot IPO
A popular tech company IPOs at $45. Demand is so high that it opens at $72 on the first trade — a 60% pop. Early investors made a fortune, but anyone buying at $72 might be overpaying in the excitement.
IPO Lock-Up Expiry
A company IPO'd 6 months ago at $30, now trading at $50. The lock-up period ends, and 50 million insider shares suddenly become eligible for sale. The stock drops to $40 as insiders take profits. Lock-up expirations can create significant selling pressure.