IPO

An IPO, short for "initial public offering," is the process by which a private company sells shares to the public for the first time and starts trading on a stock exchange. Before the IPO, the company's ownership is held by founders, employees, and private investors like venture capital firms; the IPO converts some of that private ownership into shares that anyone with a brokerage account can buy or sell.

The mechanics work roughly like this: the company hires investment banks (called underwriters) who help set an initial offering price and sell a block of shares to large institutional investors before the stock ever appears on a public exchange. Once trading opens, the price is discovered live, based on whatever supply and demand shows up from public buyers and sellers. That opening trade price can differ significantly from the offering price set the night before.

The nuance that trips up newer traders is that an IPO's first hours or days of trading often look nothing like a normal, seasoned stock. There is little price history, no settled sense of "fair value," and sometimes a limited number of shares actually available to trade if insiders and early investors are locked up (restricted from selling for a set period). This combination can produce large, fast price swings in both directions that are driven more by positioning and speculation than by the company's fundamentals.

Because of this, some brokers restrict or delay access to trading a stock in its first period on the market, and market makers may pause or slow trading if the order imbalance between buyers and sellers is too extreme when it first opens.