Updated May 2026
This investing acronym has made its way into mainstream lingo. We often hear about initial public offerings (IPOs) when a hot new company decides to offer investors a piece of the action by “going public” — often garnering lots of media attention and excitement. But what exactly are IPOs and how do they work?
Let’s take a closer look.
An IPO is a company’s first offering of stock to the public. Companies typically use IPOs to raise capital for future business expansion, to pay down debt or to finance other corporate activities. This process is often called "going public."
An IPO is typically carried out through a number of underwriters, which are usually investment banks or other large financial institutions. Once you own one or more shares in a company, you are a shareholder and have a right to future profits distributed by that company. You may also have the right to vote on company matters.
When a company goes public it gains a “seat at the table” of the equity markets. This means that it can raise funds through public stock offerings. Access to funds is important because cash is often required for investment and business growth. Private companies can raise funds too, but may have fewer options available.
Being a public company has other benefits, too. For example, a liquid, publicly traded stock can be used for acquisitions and employee compensation. And sometimes going public generates excitement and interest in a company, boosting its profile.
The tradeoff to going public is the costs associated with issuing an IPO, including fees that must be paid to the investment bank and legal fees for structuring and marketing the IPO.
There are also ongoing costs. Public companies must meet various standards of transparency and reporting, and there is a fee to have a company listed on a stock exchange. In some cases, the burden of being public outweighs the benefits.
When company owners make the decision to take their company public, they first hire an investment bank to help structure the deal and lead the process. The investment bank will help the company determine the amount of money to raise, appropriate terms and timing.
The investment bank serves as “underwriter” of the deal. These underwriters ensure that the company issuing the IPO satisfies regulatory requirements, such as filing with the appropriate regulatory bodies, depositing all fees and making all mandatory financial data available to the public. The lead underwriter will often partner with other underwriters to form what is called a syndicate, thus spreading the risk of the deal.
Once the company’s preliminary IPO prospectus is filed with regulators there is a requisite "cooling-off period", (a period when you can’t purchase the stock) during which the regulators perform due diligence on the company and the underwriters coordinate a "road show." The road show is designed to assess demand for the deal, primarily with institutional investors who are able to make large investments.
The success of the road show and anticipated demand will ultimately dictate the price at which shares are offered on the effective date (the date when stock is offered to the public). This price can change until the end of the road show period, which is one of the reasons expressing interest in an IPO can be more complex than buying after it is publicly available.
And finally, the stock is sold to investors and the proceeds, after fees, go to the company.
Company insiders often sign an agreement with the underwriters that limits their ability to sell their shares for a post-IPO "lockup period." The period can range from three to 24 months. For more details on specifics, you should review the offering documents for the individual IPO.
It’s easy to get caught up in the excitement when a company first goes public. But how do you determine whether or not to jump in?
The benefit of participating in any new issue (IPO or otherwise) always depends on the quality of the company doing the issue, the market’s view of that company, and the stock price or yield offered.
IPOs can provide excellent opportunities for capital appreciation when momentum in the secondary market grows, but this is not guaranteed. In other words, do your homework and don’t just get caught up in the hype! You should always make sure that an IPO meets your investment goals and risk tolerance before you participate.
In some cases, IPOs may carry more risk than other types of equity investments. There are a few factors that can contribute to this risk, including:
Public offerings are primarily sold to institutional investors; however, some shares are also allocated to the syndicate’s retail investors.
Because the available quantity of shares issued to the public under the IPO is limited, an expression of interest does not guarantee an allocation, meaning you may receive a fill, partial fill or no fill of your order.