When a private company sells a piece of its business in the form of stock to the public, the process is known as an initial public offering, or IPO.
Companies go public to raise a large amount of cash at one time. They can then use that money to expand operations, promote themselves, or fund research without taking on a bank loan.
Before an IPO, founders, employees, other insiders, and venture capital firms may own a piece of the company. Going public lets them convert their ownership stakes into cash, since private shares can be hard to sell.
What Happens Before Shares Start Trading?
An IPO is not a single event but the end of a months-long process. Each step narrows the gap between a private company and a publicly traded one.
Selecting Underwriters
A private company that wants to go public picks one or more investment banks to underwrite, or help manage, its IPO. With the company’s own team, the banks determine how much stock to sell, the offering price, and a timeframe for going public.
Filing the S-1
The company then files an S-1 registration statement with the Securities and Exchange Commission. It’s a detailed document that discloses its financial statements, business risks, and ownership structure.
This S-1 is often the first time outside investors get a real look at the company's numbers, since private companies are not required to share them.
The Roadshow
Company executives then travel, often virtually, to pitch the business to large institutional investors like mutual funds and pension funds. Known as a roadshow, it gives them a good sense of investor demand to help determine a final share price.
Pricing the Shares
An IPO date is set, and the night before trading begins, the company and its underwriting banks agree on a final share price.
If demand is greater than expected, the price may be higher than the company originally estimated. If it’s less than expected, the price may be lower.
Listing Day
On the morning of the listing, the stock begins trading on a public exchange, such as the Nasdaq or New York Stock Exchange.
The Pros and Cons of Going Public
The biggest advantage of an IPO for a company is being able to raise millions or billions of dollars at once without going into debt. That cash infusion can help it grow and promote itself, giving it a leg up over competitors.
Offering its own publicly traded stock as compensation can also attract top executives and skilled talent. If employees can help the company become successful, the stock can rise, and their payouts can increase.
But launching an IPO and maintaining its status as a public company is expensive. Founders and management may also have to give up some control, because now they have to answer to outside shareholders.
Additional scrutiny comes from regulators because public status requires more financial disclosures and stricter rules.
Why Do IPO Prices Often Jump or Drop on Day One?
A big first-day jump is often called an “IPO pop.” It may be reported as a win, but it can also mean the company sold its shares for less than investors were willing to pay.
That gap between the IPO price and the opening trade price is called underpricing, and it represents money that went to the investors lucky enough to get shares at the offer price rather than to the company itself.
The reverse can happen too. A stock can open below its IPO price if demand cools before trading starts.
How Can You Buy Shares in an IPO?
Most everyday investors can’t buy shares at the IPO’s offering price. Banks allocate the bulk of those shares to large institutions and wealthy clients before the stock ever opens to the public.
Once the stock opens for trading, though, anyone with a brokerage account can buy shares on the open market at the price they’re going for that day. That’s how most retail investors purchase their first shares of a newly public company.
A small number of brokerages now offer a way to request an allocation at the IPO price before a stock opens. Eligibility and share quantities are typically limited, though.
Is Buying an IPO Stock a Safe Bet?
Buying into a newly public company can feel like getting in on the ground floor, but it doesn’t always pay off.
The S&P 500 tracks 500 of the largest publicly traded companies in the U.S. and is a good benchmark for the overall market.
Annual returns on IPOs beat the S&P 500 from 2016 to 2020, but they sharply lagged its performance from 2021 to 2025, according to data compiled by Fidelity Investments.
Newly public companies tend to be more volatile than established ones, since they have a shorter public track record of proving themselves.
That volatility is why you may want to treat a single IPO purchase as a small, high-risk part of your portfolio rather than a core holding.
