An initial public offering, or IPO, is when a private company sells shares to the public for the first time and lists them on a stock exchange. The sale raises money for the business, lets early shareholders sell some of their stake and creates a public market price.
IPOs are organised with investment banks that advise on timing, valuation and distribution. After the deal, the company becomes a public issuer and must meet listing standards and ongoing reporting rules set by its market. The specifics vary by country and can change, but the broad pattern is similar across major venues.
From mandate to first trade: the IPO timeline
The process starts with the company appointing banks as underwriters. They help prepare audited financials and a prospectus, the formal document that describes the business, risks and the terms of the offer. Legal and accounting due diligence runs in parallel, checking the information the market will rely on.
Marketing follows. Management speaks to potential buyers in a roadshow, either in person or online. Orders are taken during bookbuilding, where investors state how many shares they want and at what price within an indicated range. The order book guides the final offer price and how shares are allocated.
On pricing day the company and banks agree the offer price and the number of shares to sell. Settlement mechanics are set, then the shares are admitted to trading. The first public trade typically happens in the opening auction on listing day, where supply and demand meet to set the opening print. Some deals include an over allotment option, often called a greenshoe, that lets underwriters buy extra shares if demand is strong or sell borrowed shares to support trading if it is weak.
How banks set the IPO price
Valuation blends analysis and judgement. Banks and the company look at comparable listed peers and apply valuation multiples, such as price to earnings or enterprise value to revenue. They also test a discounted cash flow model, which estimates today’s value of projected cash flows. Market conditions, investor feedback and the company’s growth outlook all affect where in the range the deal clears.
The offer can include primary shares, which are newly issued and raise cash for the company, and secondary shares, which are existing shares sold by current holders. The total offered shares, divided by the post-offer share count, gives the initial free float, the slice of the company available to trade. A higher float tends to support liquidity, though it also increases supply.
Bookbuilding aims to match price with demand. If quality demand is thin, the price may be set at the bottom of the range or the deal may be downsized. If the book is covered many times over, the price can be set at the top, sometimes with the range revised. Even with a strong book, issuers often leave a small discount to encourage healthy trading and a stable shareholder base rather than a one day spike that quickly fades.
Who gets shares and how allocations work
Most IPO shares are placed with institutions, such as asset managers and pension funds, because they can take larger lines and provide ongoing liquidity. Some deals include a retail tranche, accessible through participating brokers, but access and rules vary by provider and market. Retail allocations can be capped, scaled back or lottery based.
Underwriters aim to build a supportive register. They favour investors who did the work, indicated interest early and are likely to hold rather than flip. Large orders from an institutional investor might be filled partially to spread shares across more hands. Allocation methods range from pro rata to fully discretionary. None guarantees you the size you request, even if the final price matches your bid.
After listing: lock ups, research and volatility
Once trading starts, the stock can be volatile. Early price moves are shaped by the opening auction, day one demand and stabilisation activity if a greenshoe is used. In the weeks after, banks that worked on the deal may publish research, subject to local rules on timing and separation from the underwriting function.
Insiders, such as executives and early venture funds, are commonly subject to a lock up, a contractual period when they agree not to sell more shares. The aim is to limit immediate supply. When the lock up ends, extra stock may hit the market, which can weigh on the price if demand has not grown to absorb it. The company also transitions to public company routines, including regular financial reporting, governance requirements and investor relations.
Risks, myths and how IPOs differ from other routes
There is no rule that an IPO must jump on day one. Some stocks trade up strongly, some are flat and others fall. The offer price is not a guarantee of future value, it is simply the price that cleared the book at that time and set the starting point for public trading.
Pre listing activity can create noise. In some places, informal trading in the grey market hints at where the stock might open, but these indications are not official prices and can be thinly traded. Rumour can travel faster than facts during an IPO, so concentrate on the prospectus and the company’s formal communications.
Buying in the IPO is not the only way to own the shares. Many investors prefer to watch a couple of quarters of public results before committing. Others try to buy on the first day if the stock opens near or below the offer price. There is no single right approach, only trade offs between allocation certainty, information and price.
IPOs sit alongside other listing routes. A direct listing lists existing shares without raising new money, pricing is set by supply and demand on the day rather than through an underwritten offer. A SPAC merger takes a private company public by combining with a listed cash shell, which has its own incentives and dilution mechanics. Each path has different costs, timelines and disclosure dynamics, and practices vary by market.
A quick example of offer maths
Imagine a company with 180 million shares owned by founders and early backers. It decides to raise cash by issuing 20 million new shares and some early holders sell 10 million existing shares. The total offer is 30 million shares.
If the price is set at £10, the company raises £200 million gross from the 20 million primary shares, before fees and expenses, and selling shareholders receive £100 million for their 10 million secondary shares. After the issue, there are 200 million shares outstanding, so the initial free float is 30 million divided by 200 million, which is 15 percent. The small float could mean sharper price moves until more shares are available.
The deal might include a 15 percent greenshoe, giving underwriters the right to buy up to 4.5 million extra shares at the offer price to cover over allotments. If demand is strong, they exercise the option to deliver those shares to buyers. If trading is weak, they can purchase shares in the market to close out their short, which can help smooth early price action within the rules of the market.
These mechanics do not remove risk. They simply aim to create an orderly transition from private to public ownership while balancing the interests of the company raising capital and the investors buying in.