IPO (Initial Public Offering)
An IPO, or initial public offering, is the first time a private company sells its shares to the public and lists them on a stock exchange.
An initial public offering turns a private company into a public one. The company works with investment banks, called underwriters, to prepare a detailed prospectus, register with the SEC, set a price range and market the shares to investors. On the IPO date, the shares are sold at the offering price and begin trading on an exchange.
Companies go public to raise money for growth, pay down debt, or let founders, employees and early investors sell some of their holdings. In exchange, they must publish regular financial reports and meet the exchange's rules.
Most initial shares are allocated to institutional investors, although some brokers offer access to retail customers. Everyone else can buy once trading starts, often at a price far from the offering price. First-day price jumps are common, but so are later declines. Insiders are typically restricted from selling for a lock-up period, often 90 to 180 days, and the end of a lock-up can weigh on the price.
Alternatives to a traditional IPO include direct listings and mergers with special purpose acquisition companies, known as SPACs.