UNDERSTANDING THE
IPO MARKET

The term IPO stands for initial public offering and refers to the process a company goes through the first time it lists its shares on a stock exchange in order to raise capital. Once publicly traded, both institutional and individual investors can buy shares of stock and own part of the company.

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An IPO, or Initial Public Offering, is when a company sells its stock to the public for the first time. A share of stock is essentially a piece of ownership in a company. Once a company goes public in an IPO, anyone can buy a piece of the company by purchasing a share of stock on the stock market.

IPOs create opportunities for investors, both institutional and retail. While anyone can participate in trading an IPO, there is a complex process led by underwriters and investment bankers that ensures an IPO is successful and results in a fair and stable price.

Why do companies go public?

Companies go public to raise money for their business. By selling shares of their stock, a company gets an influx of liquid capital that can fund growth, pay down debt, or provide an exit for early investors. This growth can help to build new facilities, hire more people or expand into new markets.

It is also an opportunity to create long-term incentive programs for employees, such as stock options or restricted share grants, in employee benefit plans.

What are the challenges of going public?

A company must weigh the benefits of going public against the challenges they will face in the process. For instance, although they can fund growth, they may also encounter loss of control through activist investors.

• Operational Workload – One of the most valuable resources for a company is time, and going public requires a significant investment in time. In addition to regulatory paperwork and disclosures, companies must hire bank underwriters and investment banks to help set the right price and promote the IPO in the market.
• Regulatory Requirements – Companies must meet robust regulatory requirements designed to protect investors. In the US, IPOs are governed by the Securities and Exchange Commission (SEC).
• Loss of control – Publicly traded stock can be bought by anyone. This leaves room for activist investors to become stakeholders. They can try to influence the company’s management or even buy enough shares to take control of the company.

What is the process for companies to go public in the US?

The process to go public is driven by significant regulatory requirements and company disclosures outlined in the S-1 Registration Statement for the Securities and Exchange Commission (SEC) .

1. The company hires investment banks (called underwriters) to guide the IPO.
2. The company files the S-1 Registration with the SEC, which includes the company’s prospectus as well as financial details and an intended IPO date.
3. The SEC reviews the filing. Once approved, the company and its underwriters begin promoting the IPO through a “roadshow” to potential investors.
4. The underwriters determine an initial offering price for the stock.
5. On the IPO day, ownership of shares is transferred from the company to underwriters in exchange for funds.
6. The underwriters then sell shares to institutional investors, who in turn sell shares to the wider market.

Underwriters are the quarterbacks of an IPO. Lawyers, certified public accountants (CPAs), and experts in exchange and SEC rules are also key players when preparing to go public.

What is primary distribution?

Primary distribution is the original sale of a share of stock to the public. IPOs are just one example of primary distribution and result in the creation of common stock. Other forms of primary distribution include preferred shares, debt securities, and structured notes.

During a stock IPO, the primary distribution takes place when the issuing company transfers ownership of newly issued shares to underwriters, who are usually investment banks. In return, the issuing company receives a cash payment for the shares. All of the money raised in a primary distribution goes directly to the company.

Why are institutional investors given priority in IPOs?

Institutional investors are given priority during the IPO process because they bring scale, stability, and credibility to ensure a stable price in the market. Their large capital commitments help to ensure the IPO is fully subscribed, and their presence can lend confidence to the market.

Establishing who participates in the primary distribution is critical to minimise risk and maximise efficiency for the issuer and the underwriters.

How can I evaluate if an IPO is a good investment?

One way to evaluate if an IPO is a good investment is to establish the value and prospects of a company undergoing an IPO with fundamental analysis.

To a large extent, the same tools and research methods used on stocks which have already been issued can be applied to stocks which are about to list on an exchange. Examples include sector or geographical performance. At the same time, valuation techniques can differ as IPOs are unique events. When a stock starts trading on an exchange for the first time, all the pre-IPO opinions and forecasts are to some extent superseded by hard price data.

Final Thoughts

In simple terms, an IPO is like opening the doors of a business to the public, giving individual investors a chance to become part-owners. Companies do this to access capital to use to reinvest in the company to drive growth.

IPOs fuel the growth of the equities markets. But remember, not all IPOs are successful. Going public is a sign that a company has grown enough to attract public investment, but it doesn’t guarantee future success. Some companies thrive post-IPO, while others struggle to meet expectations.

Read more about investing in IPOs on the eToro Academy.

Quiz

FAQs

Can anyone invest in an IPO?

Technically, yes, anyone can invest in an IPO – but not everyone gets access to IPO shares at the same time. When a company goes public, its shares are initially sold to a pool of institutional investors selected by the underwriter before trading on the open market.

This structure is designed to stabilise the price of the stock and establish liquidity in the market.

What is a unicorn?

A unicorn is a privately held company with a valuation exceeding $1 billion. These companies are expected to perform well when they eventually IPO. Generative-AI focused cloud computing business CoreWeave (CRWV) came out of private hands and IPO’ed in 2025. Its day-1 market capitalisation was $23bn.

What is an IPO pop?

An IPO pop is the price jump a company’s stock makes if it closes higher than its IPO price on the first day of trading. This can be a sign of underpricing or underestimating demand for the stock. Stocks can also close at prices lower than their IPO price, highlighting the uncertainty around the IPO market.

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