What is an IPO?

An IPO, short for initial public offering, is the first time a company offers its shares to the public. Once the offer closes, the shares are admitted to a stock exchange, such as the London Stock Exchange. In the UK, an IPO is also called a float or flotation.

Before an IPO, a company is private. Its shares are held by a small group, such as founders, employees, and investors like venture capital firms. After the IPO, it is a public company, and its share price is set each day by buyers and sellers on the exchange.

Why do companies go public?

There are three main reasons a company goes public. To raise money. To let existing shareholders sell. And to raise its profile.

Going public has trade-offs. A listed company must publish regular financial reports and it faces closer scrutiny from regulators, analysts, and shareholders. The IPO itself is expensive, and staying listed carries ongoing costs too.

How does an IPO work?

Every IPO is different, but most follow the same broad steps.

1. The company appoints investment banks to run the offer, along with lawyers and accountants. The banks help value the company and find investors.

2. In the UK, a company usually publishes an intention to float, which tells the market it plans to list in the coming weeks.

3. It publishes a prospectus. A prospectus is the legal document that explains the business, its finances, and its risks. If the company is listing on the London Stock Exchange’s Main Market, the Financial Conduct Authority (FCA) must approve it first. Smaller companies joining AIM, the London Stock Exchange’s growth market, publish a similar document called an admission document instead, which the FCA doesn’t need to approve.

4. The banks suggest an indicative price range for the shares, based on talks with potential investors.

5. Through bookbuilding, the banks record how many shares investors want and at what price.

6. Using that demand, the company and its banks agree the offer price and decide how many shares each investor gets. If demand is high, investors may get fewer shares than they asked for.

7. The shares are admitted to the exchange and trading begins. In London, there’s often a short period of conditional dealing first, which occurs before the shares are admitted to trading.

Find out what happens on the first day of trading.

Who can buy shares in an IPO?

Most shares in an IPO go to institutional investors, such as pension funds and asset managers. Some IPOs also include a retail offer, which lets individual investors apply for shares at the same price through platforms and brokers.

Thinking about applying? Read [what to check before investing in an IPO](https://freetrade.io/learn/ipo-risks-opportunities), or see [which IPOs are open on Freetrade](https://freetrade.io/ipos).

Other ways a company can list

An IPO isn’t the only route to the stock market. In a direct listing, a company lists its existing shares without selling new ones, and in a SPAC merger, it joins a listed shell company set up to buy a private business. Compare the three in [IPO vs direct listing vs SPAC](https://freetrade.io/learn/spacs-vs-ipos).

Key IPO terms

• Prospectus: the legal document a company publishes before its shares are offered.
• Bookbuilding: how banks gather demand to set the offer price.
• Float: another word for an IPO, common in the UK.
• Lock-up period: a set time after the IPO when existing shareholders agree not to sell.
• Conditional dealing: trading before shares are formally admitted, usually open to institutions only.
• Direct listing: listing existing shares without selling new ones.