What is an IPO?

An Initial Public Offering (IPO) is the process by which a privately held company offers its shares to the public for the first time, aka “going public.” Virtually all of today’s largest and most influential companies went public via IPO.

The IPO often marks a significant milestone in a company's growth, as it transitions from being privately owned by a small group of investors to being publicly traded on a stock exchange. Through an IPO, a company can raise capital from the public to fund its expansion, acquisitions, or to pay down debt. It also offers liquidity for existing investors, employees, and founders who may want to cash out some of their equity holdings.

IPOs serve as a marketing event, drawing widespread media coverage and helping to increase brand visibility. The process builds transparency, permanence, and credibility for the company, which can be valuable when working with customers, suppliers, or other business partners. Furthermore, regularly forecasting and reporting quarterly earnings can often instill financial discipline among management.

For investors, IPOs represent an opportunity to add new stocks to their portfolios. With newly-listed companies, investors can potentially capture outsized returns by owning future leaders early on.

Why Do Investors Buy IPOs?

Investors add recently-listed companies (IPOs) to their portfolios for a variety of reasons, depending on their risk tolerance and investing timeframe, but generally speaking, companies that have been public for less than three to five years share unique characteristics.

Because unseasoned equities are often not found in major indices, many investors are underweight new stocks, and add newly-public companies to diversify their portfolios. Recent IPOs often feature innovative and high-growth companies that benefit from near-term tailwinds, but it is also common to see larger, more mature profitable companies go public as well. While certain IPO traders seek the thrill of owning a new company with exciting growth plans, others look to get in early on a relative unknown that could become the next trillion-dollar company.

Why do IPOs share these characteristics? Much of it boils down to a lack of information and attention. Early on, investors don’t know: Can management hit their numbers? Will the market assign a premium or discounted valuation compared to peers? Will pre-IPO shareholders dump their holdings or stay put?

This lack of information results in a stock price that either overestimates or underestimates a company’s true potential to a much greater degree than other public companies. With little else to go on, public investors will punish companies that disappoint and reward companies that over-deliver.

Here are some of the top reasons investors actively invest in new stocks:

• Potential for High Growth: IPO companies are often in growth phases or emerging industries, offering opportunities for significant returns as the business scales.

• Potential for Outsized Returns: Because they lack a trading history, there is less consensus in the market over the appropriate price. High-conviction buyers that are able to spot winners can enjoy outsized returns.

• First-Mover Advantage: Investing early can offer a head start in owning shares before increased demand and wider recognition potentially drives prices higher.

• Diversification Opportunities: IPOs allow investors to access new sectors, industries, or innovative businesses that might not be available in major stock indices.

• Participation in Innovation: Many IPOs are launched by companies with cutting-edge technologies or novel business ideas, attracting investors seeking exposure to innovation.

• Brand Recognition: Well-known companies going public often draw interest from investors who are familiar with their products or services.

• Market Sentiment and Momentum: IPOs can generate excitement and optimism in the market, leading to short-term gains driven by demand and hype.

Key Phases of an IPO

1. Pre-IPO Preparation

• Timeframe: Years before going public

• Objective: To prepare the company for public scrutiny and regulatory requirements.

The process of going public begins long before a company formally files for its IPO. It often takes years of preparation, including strengthening corporate governance, refining financial controls, and making the company more transparent. The company typically hires a Chief Financial Officer (CFO), an auditor, investor relations staff, and legal advisors to help guide the process. In addition, independent directors are usually brought on board to help shape the company’s strategic direction and ensure proper governance.

2. Choosing Advisors & Underwriters

• Timeframe: Several months before filing

• Objective: To select the investment banks that will lead the offering and underwrite the IPO.

The company then begins a “bake-off” or "beauty contest" to select its lead manager, also called the lead underwriter, as well as joint bookrunners and other investment banks to underwrite the deal. These banks help determine the structure, timing, and pricing of the offering. The selection of underwriters is critical, as these financial institutions will also be responsible for marketing the IPO to potential investors.

3. Confidential Filing & SEC Review

• Timeframe: 3-6 months before the offering

• Objective: To complete regulatory paperwork and work with the SEC to ensure proper disclosures.

Before filing publicly, many companies file a confidential registration statement with the U.S. Securities and Exchange Commission (SEC). This allows the company and its legal counsel to work privately with the SEC staff to address any missing disclosures, regulatory issues, or concerns. Once the company has worked through these confidential discussions and the SEC is satisfied, the company files a public registration statement.

This public filing, known as the S-1, is typically more than 200 pages long, and contains a treasure trove of information, such as the company’s financials, business operations, the competitive landscape, management details, ownership structure, and risks. The IPO prospectus is made available to the public via the SEC’s EDGAR database.

4. The Roadshow

• Timeframe: 1-2 weeks before the offering

• Objective: To market the offering to potential investors and gauge demand.

After the public filing, the company embarks on a roadshow. This is a series of presentations and meetings where company executives and the underwriters meet with institutional investors to promote the IPO. The roadshow provides potential investors with an opportunity to ask questions, assess the company's future prospects, and get a better understanding of the investment opportunity.

During the roadshow, the company and its underwriters refine their understanding of investor appetite and adjust the pricing range if necessary. The feedback gathered helps set the final offering price and the number of shares to be sold.

5. Pricing the IPO

• Timeframe: 1-2 days before trading begins

• Objective: To set the final price at which the shares will be offered to the public.

After the roadshow concludes, the company, in consultation with the lead manager and underwriters, decides on the final IPO price. This price is based on the feedback from institutional investors, market conditions, and the company’s own valuation. The final price is typically disclosed the evening before trading begins. The company also determines the number of shares to be sold in the offering, and this final decision is crucial for the company’s ability to raise sufficient capital and achieve a successful IPO.

6. First Day of Trading

• Timeframe: The day after pricing

• Objective: To launch the stock on the exchange and begin public trading.

On the first day of trading, the company’s stock officially begins trading on a public exchange (usually the NYSE or Nasdaq). This day is often watched closely by the media, investors, and analysts, as it can set the tone for the company’s performance in the public markets. A “pop” in the stock price—where the shares trade above the IPO price—can signal strong demand and investor optimism, while a decline can be seen as a sign of weak market reception.

Why Go Public? The Benefits of an IPO

• Capital Raising: The primary reason companies go public is to raise capital. The funds raised can be used for various purposes, including expanding operations, funding new projects, or acquiring other businesses. It provides a source of capital that can fuel long-term growth and reduce dependence on private investors or debt financing.

• Liquidity: An IPO offers liquidity for existing investors, employees, and company founders who may wish to sell some of their holdings. This provides a way for them to realize the value of their investment in the company.

• Public Profile & Brand Visibility: Going public often generates significant media coverage. This can help raise awareness of the company, attract new customers, and strengthen relationships with partners and suppliers. Many employees also see value in working for a public company, as it offers a sense of permanence and credibility.

• Future Access to Capital: Once a company is public, it has greater flexibility to raise funds in the future by issuing additional shares through follow-on offerings or issuing bonds. Being publicly listed gives companies broader access to the capital markets, which can be crucial for future growth and expansion. Companies can also more easily use stock to make acquisitions.

• Attracting Talent: Public companies often use their stock as a form of compensation, offering stock options to employees as an incentive. This can help attract top-tier talent and align employee interests with the long-term success of the company.

• Financial Discipline: Setting financial goals and answering to public shareholders can encourage executives to to allocate capital more efficiently.

Costs and Challenges of an IPO

• High Costs: Going public is an expensive process, involving significant legal, accounting, and underwriting fees. The costs can run into the millions of dollars. There are also ongoing expenses related to compliance, such as reporting requirements and investor relations.

• Regulatory Requirements: Public companies are subject to stringent regulations designed to protect investors. These regulations require extensive financial disclosures, quarterly earnings reports, and adherence to governance standards. Companies must comply with the Sarbanes-Oxley Act and other SEC rules, which can be time-consuming and costly.

• Loss of Control: Once a company goes public, its executives and founders may lose some control over the company’s direction. Public companies are accountable to shareholders, and management must often make decisions with shareholders’ interests in mind, which can sometimes conflict with a founder's long-term vision.

• Market Pressure: Public companies face pressure to meet quarterly earnings expectations and provide regular updates on their performance. This short-term focus can sometimes hinder long-term strategic planning and innovation.

IPO Market Trends and Performance

The performance of IPOs can vary significantly depending on market conditions. In periods of strong economic growth and investor optimism, IPOs tend to perform better, and companies often see their stock prices rise significantly in the first days or weeks after the offering. However, in times of market volatility or economic uncertainty, IPOs can struggle, with companies often pricing their shares lower than expected or seeing their stock prices fall after trading begins.

The market for IPOs has historically been cyclical, with periods of heightened activity followed by slowdowns. In recent years, tech IPOs have dominated the market, with companies in the e-commerce, cloud computing, and social media sectors leading the charge. However, other industries such as biotech, fintech, and electric vehicles have also seen strong IPO activity.

IPO Cheat Sheet: Key Terms, Importance, and Investment Insights

1. Initial Public Offering (IPO)

• Definition: The process by which a private company sells its shares to the public for the first time.

• Importance: The IPO marks a company’s transition from a private business to a public entity, providing it with capital to fund growth, pay off debt, or make acquisitions.

• Investment Insight: Look for strong market demand, a solid business model, and a clear use of proceeds in the prospectus. Also, check if the company has a proven track record and growth potential in its sector.

2. Underwriter

• Definition: An investment bank or financial institution that helps manage the IPO process, including pricing, structuring, and selling the shares.

• Importance: The underwriters are critical in determining the price of the IPO and generating investor interest. Their reputation can signal the quality of the offering.

• Investment Insight: A reputable underwriter (like Goldman Sachs or JPMorgan) can signal confidence in the offering, suggesting a well-executed IPO. Ensure that the underwriter has a history of successful IPOs in similar industries.

3. Lead Manager

• Definition: The primary underwriter overseeing the IPO’s structure and distribution.

• Importance: The lead manager sets the tone for the offering and is responsible for managing risk, including setting the price and deciding how to allocate shares.

• Investment Insight: Review the lead manager’s track record of successful IPOs. Strong leadership from an experienced team can increase the likelihood of a well-priced offering with strong post-IPO performance.

4. Roadshow

• Definition: A series of presentations by company executives and underwriters to potential institutional investors to drum up interest in the IPO.

• Importance: The roadshow is where investor demand is gauged, which influences the IPO price. A successful roadshow generates high interest, leading to a more favorable price.

• Investment Insight: Pay attention to the feedback and demand indicated during the roadshow, as it can impact the IPO price. A highly oversubscribed roadshow suggests strong investor confidence in the company.

5. S-1 Filing

• Definition: The registration statement filed with the SEC containing critical information about the company’s financials, risks, and business plans.

• Importance: The S-1 filing is a vital resource for investors to assess the company’s viability and growth prospects. It contains the company’s financial health, management structure, and growth strategy.

• Investment Insight: Scrutinize the financial statements (income statement, balance sheet, and cash flow), the company’s growth plans, and any risk factors listed. High revenue growth and clear competitive advantages are positive signs.

6. Prospectus

• Definition: A document part of the S-1 filing that provides detailed information on the company's financials, business model, risks, and IPO terms.

• Importance: It’s the most comprehensive document for investors, offering transparency and insight into the company’s operations, market opportunity, and future outlook.

• Investment Insight: Analyze the use of proceeds, risk factors, and market opportunities. Strong market potential and a compelling growth story are important, while excessive debt or unclear business models are red flags.

7. Bookbuilding

• Definition: The process in which underwriters assess investor interest at various price points to help determine the final IPO price.

• Importance: Bookbuilding helps set a fair price by gauging investor demand. The final price influences the initial returns an investor can expect.

• Investment Insight: A high demand during bookbuilding is a strong indicator that the IPO could be successful. If the offering is heavily oversubscribed, it may signal that investors expect strong future growth.

8. Price Range

• Definition: The initial price range set for the IPO, giving investors an idea of the expected price per share.

• Importance: The price range sets expectations for the offering’s success and can signal how the company is being valued by the underwriters.

• Investment Insight: Compare the price range with the company’s fundamentals and industry peers. If the price seems too high for the company’s stage or market potential, it could indicate overvaluation.

9. IPO Pricing

• Definition: The final price at which the IPO shares are sold to the public, set by the company and its underwriters after the roadshow.

• Importance: The pricing of the IPO is critical in determining how much capital the company raises and how it’s perceived by the market.

• Investment Insight: A well-priced IPO should align with the company’s fundamentals and market conditions. If the stock opens at a much higher price (first-day pop), it may indicate that it was priced too conservatively.

10. Offering Size

• Definition: The total number of shares offered in the IPO and the amount of capital to be raised.

• Importance: The offering size indicates how much capital the company seeks to raise, as well as the relative size of the company in the market.

• Investment Insight: Larger offerings may indicate a more mature company with more stability, while smaller offerings may suggest that the company is in an earlier growth phase. Ensure the offering size matches the company’s growth stage.

11. Lock-Up Period

• Definition: The period after the IPO (typically 90–180 days) during which a company and insiders are restricted from selling shares.

• Importance: The lock-up period prevents the market from being flooded with shares immediately after the IPO, which helps stabilize the stock price. A 180-day lock-up means that management must demonstrate their ability to set and meet expectations at two quarterly earnings releases before existing owners are able to sell.

• Investment Insight: Be cautious of upcoming lock-up expiration dates. When insiders can sell, it may result in price volatility as they liquidate their holdings, potentially leading to a drop in share price. On the other hand, a lack of selling after a lock-up may be interpreted as a buy signal.

12. Underwriting Discount

• Definition: The fee that underwriters charge the company for handling the IPO, typically 3-7% of the offering proceeds, depending on the size of the deal.

• Importance: This fee affects the company’s net capital raised. A higher underwriting fee may reflect more complex deals or larger underwriter involvement. Companies may seek to lower underwriting fees by pursuing a direct listing, though this approach does have its drawbacks.

• Investment Insight: Investors should be aware that a company receives the net proceeds - and not gross proceeds - of an IPO.

13. Secondary Offering

• Definition: An offering where existing shareholders (like early investors or employees) sell their shares to the public, rather than the company raising new capital. The term is sometimes used to refer to any follow-on offering.

• Importance: Secondary offerings can affect the stock price as insiders cash out their holdings, often signaling a desire to monetize investments.

• Investment Insight: If a secondary offering is announced after the IPO, it could depress the stock price. Make sure to evaluate whether the company is raising new capital or just facilitating liquidity for insiders.

14. Quiet Period

• Definition: For investors, this is the 25-day period following the IPO during which the company’s investment banks refrain from issuing research. Company executives are also subject to a “quiet period” when they commence the IPO process, restricting them from making any material statements not found in the IPO prospectus.

• Importance: The quiet period ensures that the IPO prospectus fully includes all relevant disclosures up until the IPO, and that no additional information unfairly influences the stock price immediately after the offering.

• Investment Insight: Investors can typically count on good news about a stock when the IPO quiet period ends, since the banks that ran the offering almost always issue Buy ratings. That doesn’t mean the stock will trade up; for example, investors may sell if Wall Street issues a price target with “only” 10% upside. In addition to the overall rating, equity analysts may provide new insights about a company’s prospects that the market had not fully considered.

15. Public Float

• Definition: The number of shares available for trading in the open market, excluding shares held by insiders and company management.

• Importance: The float determines stock liquidity; a higher float typically means more shares are available for trading, leading to greater liquidity and price stability.

• Investment Insight: A smaller float can result in more volatile price movements post-IPO. If the company has a low float but strong demand, it could lead to high price swings, which might be an opportunity for short-term investors, but a risk for the medium-term.

16. Primary vs. Secondary Market

• Primary Market: Where new shares are sold directly by the company. For some companies, the IPO is the only instance of a primary share offering.

• Secondary Market: Where shares are bought and sold after the IPO (on exchanges like NYSE or Nasdaq).

• Importance: The primary market raises capital for the company, while the secondary market provides liquidity for investors.

• Investment Insight: Understand the deal dynamics at play when a company offers shares to institutions at the offer price, and the post-IPO trading activity that follows on the secondary market. Market sentiment.

17. Stock Exchange

• Definition: The platform (e.g., NYSE, Nasdaq) where shares of publicly traded companies are bought and sold.

• Importance: The exchange determines the accessibility and liquidity of the stock, and different exchanges have their own listing criteria. Companies may choose to list on one exchange over another based on price, publicity, and index eligibility.

• Investment Insight: While the Nasdaq is known for hosting tech stocks, and the NYSE has a reputation for larger, more established companies, both exchanges cater to all types of companies and generally offer the same level of liquidity and price discovery. These national exchanges have more requirements than the OTC exchanges, whose stocks tend to be more risky.

18. First-Day Pop

• Definition: When the IPO stock price increases significantly on its first day of trading.

• Importance: A first-day pop often signals strong market demand and positive sentiment towards the company.

• Investment Insight: A high first-day pop can indicate that the IPO was underpriced or that the market sees significant upside potential in the company. Be cautious of IPOs with a significant initial price spike as they may face price corrections later. Don’t feel pressured to buy on the first day of trading.

19. Ticker Symbol

• Definition: A unique identifier for the company’s stock, typically a 1-5 letter abbreviation.

• Importance: The ticker symbol is used to identify the company on stock exchanges and is essential for trading.

• Investment Insight: Make sure you know the ticker symbol of the company you’re interested in. Ticker symbols can provide quick access to financial data, stock performance, and news updates.

20. Filing Fee

• Definition: The fees paid to the SEC when a company files its S-1 registration for an IPO.

• Importance: Filing fees are part of the regulatory costs for taking a company public.

• Investment Insight: While these regulatory fees are just a fraction of the total amount raised (or even the amount spent on underwriter commissions, and legal and accounting fees), be aware that a company will receive the net proceeds - and not gross proceeds - of an IPO.

21. Subscription

• Definition: The act of committing to purchase shares in an IPO at the offer price.

• Importance: Indicates investor commitment and demand before the stock is publicly traded.

• Investment Insight: Underwriters always try to cover the order book multiple times over, so investors will look for signs of a 10x or 20x oversubscription, where the demand far exceeds the shares offered, to signal high investor confidence. Of course, it is generally not a good idea to buy shares on that basis alone; some of the most spectacular IPO flops in history have been the result of investors subscribing because it’s supposed to be a “hot deal.”

22. Greenshoe Option (Over-Allotment Option)

• Definition: An option granted to underwriters to buy additional shares (usually up to 15%) at the IPO price if demand exceeds supply.

• Importance: Provides flexibility and market stabilization during the first few days of trading.

• Investment Insight: If exercised, the Greenshoe option can prevent post-IPO price volatility by increasing the stock’s supply in the market, which might help the price stabilize. It can also increase the net proceeds from an offering.

23. Float

• Definition: The total number of shares available for public trading.

• Importance: A high float usually means better liquidity and lower volatility, while a low float can result in higher price volatility.

• Investment Insight: A smaller float with strong demand can lead to price appreciation, but it could also result in greater volatility. If liquidity is a concern, it’s often better to avoid IPOs with a very small float.

24. Direct Listing

• Definition: The process by which a company goes public without selling shares in an underwritten offering. Instead, existing shareholders register to sell their shares directly on a stock exchange, bypassing the underwriters.

• Importance: Direct listings can result in cost-savings for a company with widespread recognition that does not need to raise new funding in an IPO, such as Spotify in 2017, which completed the first major direct listing. Because of the liquidity premium, however, most sizable companies should be able to get a higher valuation in public markets than in private markets.

• Investment Insight: Institutional IPO buyers view direct listings with less urgency compared to an allocation on a traditional underwritten offering. In theory, direct listings may see more sustained aftermarket demand, as institutions fill their positions entirely in the open market, while traditional IPOs should have a public investor base consisting of long-only funds with a firm conviction in the stock, but neither of these are reliably true, and there are relatively few direct listings each year. While investors should perform the same due diligence with a direct listing as a traditional IPO, it is important to note that most direct listings do not have a lock-up, which allows insiders to immediately dump their holdings.

Largest US IPOs to Date

Below we list some of the largest US IPOs in history.