What is an IPO?

An IPO, or initial public offering, is when a private company sells its shares to the public for the first time and lists them on a stock exchange. It’s a company’s big stock market debut.

Before an IPO, a company is usually owned by a relatively small group, such as its founders, employees, and private market investors like venture capital and private equity funds. After, anyone with a brokerage account can buy a piece.

Why companies go public:

• To raise money. Selling new shares brings in cash to grow the business, pay off debt, or fund new projects
• To let early backers cash out. Founders, staff, and investors can sell some of their shares
• To raise their profile. Being listed can boost credibility with customers, partners, and future hires

How an IPO works, in a UK nutshell

1. The company hires banks and advisers and gets its house in order.
2. It publishes a prospectus setting out the business, the risks, and the offer.
3. Banks gauge demand from big investors through bookbuilding and set the price.
4. Shares may trade briefly on a conditional basis (conditional dealing).
5. The shares achieve formal admission and open to trading for everyone.

IPOs aren’t the only way in. Some companies go public through a direct listing or by merging with a SPAC.

Worth knowing before you buy

A shiny new listing can be exciting, but IPO shares come with their own risks. There’s usually less public trading history to go on, prices can swing wildly in the early days, and a lock-up period ending can bring a wave of insiders selling.

Related terms: Prospectus, Bookbuilding, Float, Formal admission