Initial Public Offering/IPO

An initial public offering, or IPO, is the first time a company sells shares of itself to the general public on a stock exchange. Before the IPO, the company is privately held, meaning its ownership is split among founders, employees, and private investors like venture capital firms, and none of that stock trades on a public market. After the IPO, anyone with a brokerage account can buy and sell the stock.

To get there, the company works with investment banks called underwriters, who help set an initial price, prepare the required disclosure documents, and line up early buyers before the stock opens for public trading. On the morning the stock actually starts trading on the exchange, the price you see quoted can differ, sometimes wildly, from the price the underwriters originally set, because the opening trade is set by real-time supply and demand rather than the underwriters' estimate.

The nuance that trips people up is that the "IPO price" and the "opening trade price" are two different numbers. The IPO price is what large institutional investors typically pay in the private allocation before trading begins. The opening price is what the stock first trades at on the open market, and it can be far higher or lower. Retail traders almost never get the IPO price itself; they are buying at whatever the market decides once trading opens, which is often chaotic in the first minutes or days.

New IPOs also frequently carry a "lock-up period," a set stretch of time after the offering during which company insiders and early investors are contractually barred from selling their shares. When that lock-up expires, a wave of new selling can hit the stock, which is a mechanic worth knowing about even though the exact length of a lock-up varies by deal.