Investing Basics

Initial Public Offering (IPO)

An initial public offering, or IPO, is the first time a company offers and sells shares of its capital stock to the public.

Updated 2026-09-01 · Foundation

What changes in an IPO

The company moves from private ownership into a structure where shares can trade in the public market after the offering closes and listing requirements are satisfied.

The transaction can also raise capital.

Those are related outcomes, but they are not identical.

Primary and secondary shares

An IPO can include:

primary shares newly issued by the company
secondary shares sold by existing shareholders
both types in the same deal

Cash from primary shares goes to the issuer before fees and expenses.

Cash from secondary shares goes to the selling shareholders.^[1]

That distinction matters when assessing how much new capital the business actually receives.

The registration process

A U.S. company commonly uses Form S-1 to register an IPO.^[1]^[2]

The registration statement and prospectus disclose information about the company, offering terms, risk factors, management, financial statements, use of proceeds and capital structure.

The first filing may not contain a final share price.

How the offering price is set

The company and its underwriters determine the offering price before public trading begins.^[1]

Inputs can include:

valuation analysis
market conditions
investor demand
indications of interest
the order book
desired proceeds
expected after-market liquidity

Investor.gov describes the order book as a compilation of prospective client-investor demand, including desired quantities and prices.^[1]

The offering price is therefore a negotiated transaction price, not a market-clearing closing price produced by exchange trading.

Offering price vs. first trade

Suppose the IPO prices at:

$20 per share

The stock might open publicly at:

A first-day jump does not retroactively change the amount the issuer received on shares sold at the IPO price.

Likewise, a first-day decline does not mean the underwriting transaction was repriced after closing.

Allocation can be limited

Popular IPO shares may be distributed heavily to institutional or high-net-worth clients of participating underwriters.^[1]

An investor who cannot receive an IPO allocation may only be able to buy after exchange trading begins, potentially at a very different price.

Lock-ups and market overhang

Insiders and other existing holders can be restricted from selling immediately after an IPO through legal restrictions or contractual lock-up agreements.^[3]

When those restrictions end, additional supply can reach the market.

That future supply is one reason post-IPO share analysis should extend beyond the float on the first trading day.

Common mistakes

"An IPO is automatically an early-stage investment."

No. Mature companies can go public too.

"Every IPO dollar goes to the business."

No. Secondary sellers can receive part of the proceeds.

"The offering price is the stock's intrinsic value."

No. It is a negotiated price under specific market conditions.

"A first-day pop means the company raised that higher amount."

No. Issuer proceeds are based on the offering transaction.

Example

If a company sells 12 million newly issued shares at $20 in its IPO, gross primary proceeds are $240 million before underwriting discounts and offering expenses.

Professional note

Before evaluating IPO valuation, reconstruct the post-offering capitalization. Include primary issuance, existing shares, equity awards, options or warrants where relevant, and any shares becoming saleable after lock-ups expire.

Related terms

Common Stock
Common stock represents an ownership interest in a corporation and generally carries a residual claim after creditors and senior securities.
Share Dilution
Share dilution occurs when new shares or share equivalents increase the ownership denominator and reduce an existing shareholder’s percentage claim unless the holder participates proportionally.
Lock-Up Agreement
A lock-up agreement restricts specified shareholders from selling shares for a stated period after an IPO or other transaction.
Registration Statement
A registration statement is a filing with the SEC that provides required disclosures when a security or securities offering is registered under federal securities laws.
Prospectus
A prospectus is an investor-facing disclosure document that describes an issuer, an offering and the securities being offered.

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