How Do IPOs Work? The Process, Step by Step
An IPO (initial public offering) is the first time a company sells its shares to the public. The company hires banks called underwriters, files a registration statement with the SEC, pitches the shares to large investors, sets a price the night before, and starts trading the next morning.
Most of the shares usually go to institutions, not ordinary investors, which is why the first-day price can differ a lot from the IPO price. This is the whole process, and the only part you can see for free is the filing.
What are the steps of an IPO?
| Step | What happens | Where you can see it |
|---|---|---|
| 1. Hire underwriters | The company picks one or more investment banks to run the sale and take on the risk of placing the shares. | Named on the filing's cover |
| 2. File with the SEC | The company may first submit a draft privately. It must file publicly at least 15 days before the roadshow begins. | The S-1 on EDGAR |
| 3. Roadshow and book-building | Management pitches large investors, who say how many shares they would take at what price. | Mostly private; the price range shows in a later S-1 amendment |
| 4. Pricing | The company and underwriters set the final price, usually the night before trading. | The final prospectus (form 424B4) |
| 5. First trade | Shares open on the exchange. The opening price is set by orders on the day, not by the IPO price. | Any quote page |
| 6. After the IPO | Underwriters may sell extra shares (the greenshoe) and insiders are held by a lock-up. | The underwriting section of the filing |
The 15-day rule comes from an SEC policy that, since July 2017, lets any company, not only small ones, begin with a confidential draft. Haynes Boone summarizes it. That is why a company can be reported as having filed for an IPO while nothing yet appears on EDGAR, as with Anthropic.
Who actually gets the shares in an IPO?
Underwriters decide who gets shares, and they favor large institutions such as mutual funds and pension funds that place big orders and hold for a while. Ordinary investors usually get little or nothing at the IPO price.
Some brokers pass on a small slice to eligible customers, and the rest of the public buys once the stock trades. How to buy IPO shares covers each route.
Why does an IPO stock jump or fall on its first day?
The IPO price is a negotiated estimate. The first trade is set by everyone who wants to buy or sell at once, so the two can be far apart. Airbnb priced at $68 on December 9, 2020 and opened at $146 the next day, 114% higher; it closed at $144.71, according to CNBC.
Airbnb on Nasdaq, December 10, 2020. A price that more than doubles is the exception; the IPO price does not say what the first trade will be.
It can go the other way. Facebook priced at $38 in May 2012 and fell below that price on its second trading day, about 12% lower at $33.76, per TechCrunch. A first-day move is not a signal of how the company will do.
What are the greenshoe and the lock-up?
- The greenshoe (over-allotment option) lets underwriters sell extra shares, typically up to 15% more, and buy them back to steady the price if it dips.
- The lock-up stops insiders and early investors from selling for a set time, often 90 to 180 days. When it ends, more shares can reach the market, which is one reason a stock can move around that date.
Both terms appear in the underwriting section of the filing. The market cap the IPO implies counts all shares, including the locked-up ones, not only those sold.
How is an IPO different from a direct listing or a SPAC?
| Route | New shares sold? | Who sets the first price? |
|---|---|---|
| IPO | Yes, through underwriters | The company and underwriters, the night before |
| Direct listing | Not in the traditional form; existing holders sell | An opening auction on the exchange |
| SPAC merger | A listed shell company merges with the private one | A price agreed in the merger terms |
The route changes who receives the money and how much information you get before trading. The disclosure that matters most in all of them is the filing; how to read an S-1 walks through it.
IPO FAQ
What does IPO stand for?
Initial public offering: the first time a company sells its shares to the public, after which they trade on a stock exchange.
What is a roadshow?
A series of presentations in which the company's management and its underwriters pitch the shares to large investors. The orders they gather, called the book, help set the IPO price.
Can anyone buy shares at the IPO price?
Rarely. Underwriters allocate most shares to institutional investors. Some brokers offer small allocations to eligible customers, but nothing is assured, and many investors can only buy once the stock starts trading.
What is an IPO lock-up?
An agreement that stops insiders and early investors from selling for a set period after the IPO, often 90 to 180 days. When it ends, more shares can reach the market.
What is the difference between an IPO and a direct listing?
An IPO sells new shares through underwriters at a price set the night before. A traditional direct listing sells no new shares: existing holders sell on the exchange and an opening auction sets the first price.
This is the process in one place. See the full IPO guide for the private companies people ask about, and how this site handles sources. Educational content only, not investment advice.