IPOs Explained

An initial public offering is how a private company first sells shares to the public — a process involving underwriters, pricing decisions, and a lockup period, all before the stock trades freely.

The IPO process at a high level

An initial public offering, or IPO, is the process by which a private company sells shares to public investors for the first time, becoming a publicly traded company in the process. The company typically works with investment banks to prepare financial disclosures, market the offering to institutional investors, and ultimately set a price at which shares will first be sold before trading begins on an exchange.

This is different from simply listing existing shares — an IPO usually involves the company raising new capital by issuing new shares, alongside existing shareholders, such as early investors and employees, potentially selling some of their own holdings.

Underwriting and pricing

Investment banks acting as underwriters play a central role: they help the company determine an appropriate offering price, commit to buying the shares from the company before reselling them to investors, and take on some of the risk if demand falls short. Pricing an IPO is genuinely difficult, since there's no existing public trading history to reference — underwriters rely on investor demand gathered during a marketing period, comparisons to similar public companies, and the company's own financial projections.

Because of this uncertainty, IPOs are sometimes priced conservatively relative to where the stock ultimately trades once public demand is tested, which is part of why a stock can jump meaningfully on its first day of trading.

The lockup period

Most IPOs include a lockup period, typically 90 to 180 days, during which company insiders, early investors, and employees are contractually restricted from selling their shares. This is meant to prevent a flood of selling immediately after the IPO that could overwhelm demand and destabilize the new stock's price.

When the lockup period expires, a large number of previously restricted shares can become sellable at once, which is why stocks sometimes see increased volatility or downward pressure around lockup expiration dates.

Why IPO stocks can be volatile early on

Newly public companies often lack an extended track record of public financial reporting, meaning investors have less historical data to evaluate compared to established companies. Trading volumes and available shares can also be limited in the early days, which can amplify price swings. Combined with the emotional dynamics of a highly anticipated debut, this makes early IPO trading typically more volatile than trading in more established, seasoned stocks.