What Is an IPO? A Beginner's Guide to Initial Public Offerings
An Initial Public Offering, or IPO, is a method through which a company sells its shares to the public for the first time. It marks the transition of a private company to a publicly traded one, as its shares are listed on a stock exchange and can be bought and sold by public investors.
With 2026 poised to be a record-breaking year in the IPO market, there's no better time to become acquainted with the process. In this article, we explain how IPOs work and why companies choose to do them, and examine the benefits and risks involved.
The information in this article is provided for educational purposes only and does not constitute financial advice. Consult a financial advisor before making investment decisions.
Table of Contents
What Is an IPO?
An Initial Public Offering is the process by which a private company sells shares to the public for the first time.
Prior to an IPO, a company's shares are typically held by a small group of private stakeholders. These early stakeholders may include the founders, early employees and institutional investors. Going public changes that, opening ownership to anyone interested in buying shares on the open market.
Why Do Companies Go Public?
There are a number of reasons why a company might choose to go public, some of the main ones include:
- Raising Capital: An IPO allows a company to issue new shares and raise capital from the public markets.
- Providing Liquidity for Early Investors: Existing shareholders cannot easily sell their shares whilst the company remains private; a public listing gives them the opportunity to sell some, or all, of their stake.
- Profile: Listed companies attract a level of visibility that can benefit their public profile.
- Attracting and Retaining Talent: Equity-based compensation and stock options are more attractive when a company's shares are publicly traded.
Of course, there are also trade-offs to going public, such as ongoing disclosure and reporting requirements, and scrutiny from public shareholders. Consequently, not every company chooses to list, with many remaining private indefinitely.
How Does an IPO Work?
When a company wants to go public via an IPO, the first step is generally to appoint an investment bank, or banks, to act as an underwriter.
As underwriters, investment banks play an integral role in the IPO process: advising on timing and valuation, helping prepare the necessary documentation and, perhaps most importantly, acting as a middleman between the issuing company and the public.
In the most common arrangement, the lead underwriter guarantees the company will raise the required capital. It does this by buying all the shares being issued by the company and assuming responsibility for selling all of them. If shares go unsold, the underwriter bears the financial loss.
However, for this service, underwriters charge fees that can be somewhere between 3% and 7% of the total proceeds. On a large listing, that can be a significant sum of money.
Before it gets to the stage of selling shares, the company must produce a prospectus. The prospectus contains detailed information about the company's business, assets, financial history and any risks it may face. It also details what the company intends to do with the capital it raises through the IPO.
Once the prospectus is filed, the company and its underwriters embark on a "roadshow". This involves a series of presentations to institutional investors, which are intended to drum up interest and gauge how much they are willing to pay.
The full process typically takes between six months and a year, though timelines can vary.
The IPO Process: Step by Step
- Appoint Advisers: The company selects one or more investment banks to act as underwriters, as well as a legal team and accountants.
- Due Diligence and Preparation: The underwriters and advisers conduct a thorough review of the company.
- File the Prospectus: The company submits its prospectus to the relevant financial regulator for review and approval.
- The Roadshow: Management presents the business to a range of institutional investors.
- Pricing: The offer price is set before listing based on the level of demand during the roadshow.
- Listing Day: Shares begin trading on the stock exchange. The opening price is determined by the market and can differ from the offer price depending on early demand.
- The Lock-Up Period: Following the listing, existing shareholders such as founders and early investors are typically restricted from selling their shares for a set period whilst the new stock establishes itself on the market. This is designed to prevent a sudden flood of supply that could depress the share price shortly after listing.
IPO vs Direct Listing vs SPAC
Although people often use the terms "IPO" and "going public" synonymously, an IPO is not the only method by which companies can list on a stock exchange. Two alternatives have drawn significant attention in recent years: the direct listing and the Special Purpose Acquisition Company (SPAC).
Direct Listing
In a traditional direct listing, a company makes its existing shares available on a stock exchange without issuing new ones. Since no new shares are created, no fresh capital is raised by the company.
However, the rules around direct listings have evolved in some markets, with certain exchanges now permitting companies to raise fresh capital alongside a direct listing.
That said, the traditional direct listing model, of listing existing shares without raising capital, remains the more common approach. In this scenario, there are no underwriters, no roadshows, no offer prices and no lock-up periods. The opening price is determined by market forces on the first day of trading rather than being set in advance.
Spotify, Slack, Wise and Roblox are among the companies to have used this method of going public in recent years.
SPAC
A Special Purpose Acquisition Company is a shell company with no commercial operations. It is formed solely to raise money through its own IPO and to use those funds to acquire a private business.
The private company then merges with the SPAC and effectively becomes a public company without going through the IPO process. SPACs gained considerable popularity during 2020 and 2021 before falling out of favour as regulatory scrutiny increased and the post-merger performance of many SPACs disappointed.
The table below summarises the key differences between the three main routes.
How to Invest in IPOs
Traditionally, IPOs were far less accessible for the average retail investor, with institutional investors or high-net-worth individuals being allocated most of the initial shares. Whilst this gap undoubtedly still exists, it has narrowed in recent years.
For retail investors, the process of attempting to access IPO shares is typically as follows:
- Investors can check whether their broker offers IPO applications for a specific listing. Not all brokers offer this service and those that do may not cover every IPO.
- Reviewing the prospectus before applying is worthwhile, as it contains important and detailed information about the company.
- An application can be submitted during the offer period, subject to any minimum investment amount set by the broker.
- Allocations are confirmed after the offer period closes. In heavily oversubscribed listings, retail investors may receive fewer shares than applied for or none at all.
- Where no IPO allocation is received, shares can be bought on the secondary market once listing is complete. However, popular IPOs often open sharply above their offer price, meaning investors potentially miss out on this IPO "pop".
It's also possible to gain exposure to the price movements of a newly listed stock through derivatives such as Contracts for Difference (CFDs).
These allow traders to speculate on a company's share price without owning the underlying shares. However, CFDs are complex instruments which are associated with higher risk and are not suitable for everyone.
Risks for IPO Investors
Investing in IPOs carries a set of risks that are worth understanding:
- Early Volatility: Newly listed stocks can experience sharp price swings in the first weeks and months of trading as the market settles on a valuation.
- Limited Track Record: At the point of listing, the financial information available to investors is more limited than it will be once the business has reported through several cycles as a public company.
- Lock-Up Expiry: Once the lock-up period ends, the market for a newly listed stock can come under pressure if insiders start to sell significant volumes of shares.
- Overvaluation: In periods of strong IPO activity or where an individual listing generates particular excitement, companies can list at valuations that price in optimistic growth assumptions. If those assumptions do not come to fruition, the downside for IPO investors may be steep.
Notable IPOs: Some of the Largest in History
The table below shows the five largest IPOs ever, at the time of writing.
Source: Renaissance Capital - All Time Largest Global IPOs. Date Captured: 5 June 2026.
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Frequently Asked Questions
What Does IPO Stand For?
IPO stands for Initial Public Offering. It refers to a process through which a private company sells its shares to the public for the first time and becomes a public entity.
How Is an IPO Price Determined?
The offer price is determined through a process known as book-building in which the company's underwriting banks gauge demand from institutional investors. The final offer price is typically agreed the evening before the first day of trading, balancing the company's fundraising objectives against what the market appears willing to pay.
Can Retail Investors Buy Shares at the IPO Price?
In theory, yes. Some brokers allow retail investors to submit applications for shares during the offer period. However, in practice, retail applications, where they exist, are significantly limited and high-profile listings are almost always heavily oversubscribed. The more accessible route for most retail investors is to buy shares once the IPO has taken place.
How Long Is the Lock-Up Period After an IPO?
Lock-up periods typically last between 90 and 180 days following the listing. During this time, existing shareholders are restricted from selling their shares, which helps to limit the initial supply on the market.
What Was the Largest IPO in History?
Saudi Aramco's 2019 listing on the Tadawul exchange in Saudi Arabia remains the largest IPO in history, at the time of writing, raising $25.6 billion.
What Happens if an IPO Is Oversubscribed?
An IPO is oversubscribed when investor demand exceeds the number of shares available. In this situation, underwriters and brokers allocate shares according to their own criteria. Applicants may receive fewer shares than requested, or none at all. Heavy oversubscription can also contribute to a gap between the offer price and the opening price on the first day of trading.
What Is the Difference Between the IPO Price and the Opening Price?
The IPO price, also known as the offer price, is set before the company begins trading, based on the book-building process during the roadshow. The opening price is the first price at which shares actually trade on the stock exchange once trading begins. The two prices can, and often do, differ. Strong demand on the first day can push the opening price above the offer price, whilst weak demand may see shares open below it.
Is an IPO the Same as Going Public?
Not exactly. Going public refers to any process by which a company first makes its shares available on a public exchange. Whilst an IPO is the most common route, there are alternative options, including direct listings and SPAC mergers.
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