What is an IPO: A Simple Explanation for Private Investors

An IPO, or initial public offering, is the first sale of a company's shares to the general public, usually together with a listing on an exchange such as the NYSE or Nasdaq. The company raises capital, its early shareholders get a future way to sell, and other investors can buy the stock once trading begins.

Why do companies go public?

Most companies go public to raise money for growth and to create a market for their shares.

According to the SEC's investor bulletin on IPOs, most large IPOs include only new shares, so the money goes to the company. When existing shareholders sell part of their stake in the offering, that money goes to them. Early investors often see the IPO as their exit, as described in our guide to the pre-IPO market.

How does an IPO work, step by step?

A US IPO moves from filing to SEC review, marketing, pricing and the first trade.

1. Registration statement. The company files Form S-1. Most of it is the prospectus: business, risk factors, use of proceeds, dilution and audited financials. The SEC accepts drafts for nonpublic review, but the filing must be made public at least 15 days before any roadshow.
2. SEC review. Staff comment on the disclosure, the company revises it, and the SEC declares the registration statement effective. This is not an approval of the investment.
3. Roadshow. Management and the underwriters present the company to investors and collect indications of interest — how many shares each wants and at what price.
4. Pricing. The underwriters recommend a price, the company decides, files the final prospectus and shares are allocated.
5. First day of trading. At first, generally only the shares sold in the IPO trade, and the underwriters may buy shares to keep the price from falling too far below the offering price.

How is the IPO price set?

The offering price is a negotiated estimate of the company's value, not a market price.

The company wants a high price to raise more capital. The underwriters are typically paid a percentage of the offering price, but they also need a price attractive enough to sell every share. Underpricing increases demand, which is one reason shares often rise on the first day.

That rise is not guaranteed. In IPO data from Jay Ritter of the University of Florida, which excludes SPACs and offerings priced below $5, the average first-day return of US IPOs in 1980–2025 was 19.0%, yet in 2025, 24.4% of IPOs closed their first day below it.

IPO, direct listing and SPAC: what is the difference?

All three make a company public; they differ in who sells shares, how the first price is set and whether a lock-up applies.

The NYSE says it helped pioneer the first direct listing, Spotify's, in 2018. According to the SEC's bulletin on SPACs, a SPAC typically has two years to complete a merger, and its shareholders can usually redeem their shares for a pro rata share of the money held in trust.

Can a private investor buy shares at the IPO price?

Sometimes, but rarely in popular deals. The SEC describes two ways: buy in the offering as a client of one of the underwriters, or buy on the exchange once trading starts.

Underwriters often place most shares with funds, insurers and wealthy clients, so most individuals buy after the listing at a market price that may be well above or below the offering price. When the underwriters stop supporting the price, it can fall significantly. Buying before the IPO is a different deal with its own rules, compared in how pre-IPO differs from an IPO.

What is a lock-up and why does it matter?

A lock-up is an agreement under which insiders do not sell their shares for a set period after the IPO, most often 180 days. Its terms must be disclosed in the prospectus.

When the lock-up expires, the price may fall if many shares reach the market at once; the prospectus section "Shares Eligible for Future Sale" shows how many. For someone who bought before the IPO, the lock-up is why a listing does not mean instant cash — see how to exit a pre-IPO transaction.

What are the risks of investing in an IPO?

The SEC warns that IPOs can be risky and speculative investments: a new public company has no trading history, and the prospectus is often the only detailed source of information.

• Price swings. Few shares trade at first, so the price can move sharply either way.
• Dilution. IPO buyers usually pay much more per share than founders and early investors did.
• Limited control. In a dual-class structure, founders can control the company without a majority of its shares.
• Lighter disclosure. Emerging growth companies, generally those with under $1.235 billion in revenue, may disclose less for up to five years.