What Is an IPO? How Initial Public Offerings Work

What is an IPO?

An IPO, or initial public offering, is the first registered sale of a private company's shares to the public. After the offering, investors can generally buy and sell the stock on a public exchange through a brokerage account.

The simplest IPO meaning is that a company is moving from private ownership toward public ownership. The company gets access to public capital, but it also takes on securities-law requirements, regular financial reporting, and scrutiny from investors.

You can follow announced and expected offerings with our IPO calendar. Dates and terms can change, so confirm the latest filing before making a decision.

How an initial public offering works

An IPO is a process, not a single event. A company usually hires investment banks as underwriters, along with attorneys and accountants. It then files a registration statement with the Securities and Exchange Commission, commonly using Form S-1 for a U.S. operating company.

The registration statement includes a prospectus describing the business, management, financial condition, intended use of proceeds, principal risks, ownership, and securities being offered. SEC staff reviews the filing for compliance with disclosure rules. That review does not mean the SEC approves the investment, endorses the company, or guarantees that the disclosure is accurate.

The company may revise its filing as details develop and SEC comments are addressed. Management and the underwriters then market the offering, assess demand, set the number of shares and final price, and allocate shares. Once pricing is complete, exchange trading generally begins. The market price can move above or below the offering price immediately.

A traditional U.S. IPO generally follows this path:

The IPO process in six steps

Types of IPO shares and a simple example

An offering may include primary shares, which are newly issued by the company, and secondary shares, which existing shareholders sell. Proceeds from primary shares generally go to the company before expenses. Proceeds from secondary shares generally go to the selling holders. One IPO can include both.

Suppose a company offers 10 million new shares at $20 each. Its gross proceeds would be $200 million before underwriting discounts and other costs. An investor allocated 25 shares would commit $500 at the offering price. If exchange trading opens at $27, someone buying in the market pays $27, not the original $20.

That difference explains why a headline about a first-day gain does not describe every investor's return. Allocation, purchase price, fees, and the eventual sale price all matter.

Why companies go public and how the price is set

A company may use an IPO to fund expansion, research, acquisitions, debt repayment, or another purpose disclosed in its prospectus. Public shares can also support employee compensation or future acquisitions. The offering may give founders, employees, and early investors a route to liquidity.

Insiders often cannot sell immediately. Lock-up agreements restrict sales for a set period, and Investor.gov says many last 180 days. Terms vary, so check the prospectus. Going public also creates costs, reporting duties, possible dilution, and pressure from a wider group of shareholders.

The company and underwriters set the offering price after reviewing its finances, growth prospects, comparable companies, market conditions, and investor demand. Once trading starts, supply and demand determine the market price. You can monitor listed companies through our stock prices page, but a quote alone does not show whether a stock is fairly valued.

How individual investors can buy IPO shares

To request shares before public trading, you generally need an account with a broker participating in the offering. Our guides to brokerage accounts and investment apps can help you compare the broader choices available to U.S. investors.

Access is not guaranteed. Brokers may impose eligibility rules, receive limited allocations, or prioritize certain clients. Even after submitting an indication of interest, you may receive fewer shares than requested or none. Read the broker's terms and confirm the final price before accepting an allocation.

You can instead wait until the stock starts trading. A limit order specifies the highest price you will pay, which can help control your purchase price during volatile trading. Review the basics of how to invest before buying an individual new issue.

How to evaluate an IPO

Start with the prospectus on the SEC's EDGAR system. Focus on what the company sells, how it earns money, whether revenue is concentrated, how much debt it carries, and how management plans to use the proceeds. Read the risk factors as company-specific disclosures, not boilerplate to skip.

Check which shareholders are selling. Review voting rights, related-party transactions, executive compensation, dilution, and whether one group will retain control. A dual-class structure, for example, may give founders voting power far beyond their economic ownership.

Compare the proposed valuation with the company's performance and realistic peers. A compelling product or familiar brand does not automatically make the stock attractively priced. Decide what must go right, what could go wrong, and whether the possible loss fits your plan.

U.S. portfolio, tax, and practical context

A single IPO carries company-specific risk. Diversified vehicles such as an exchange-traded fund, a mutual fund, or an index fund spread exposure across multiple holdings. Each fund still has its own strategy, costs, and risks. If you buy an IPO, consider limiting its size within a broader portfolio.

Buying shares does not by itself create a capital gain or loss. A taxable gain or loss generally arises when you sell, based on the amount realized minus your adjusted basis. The IRS generally treats gains and losses on assets held for one year or less as short term and those held for more than one year as long term. Net short-term gains are generally taxed as ordinary income. State taxes and individual circumstances can change the result, so keep trade records and consult a qualified tax professional when needed.

Broker access, allocation rules, commissions, regulatory fees, account type, and order type can affect your outcome. Compare costs and features before opening an account, and do not assume every broker offers every IPO.