An IPO, or initial public offering, is the first sale of a company's shares to the general public, after which the shares trade on an exchange. It is the moment a private company turns into a public one: it raises money from new investors, and its founders and early backers gain a market where they can eventually sell. Every other trade in the stock afterward happens between investors, which is why the company receives money from the IPO and not from later trading, as what is a stock explains. The wider basics are in the stocks hub.
How does an IPO work?
A company registers the shares with the SEC, hires underwriters to sell them, markets the deal to investors, sets a price and lists the stock on an exchange.
| Stage | What happens | Where it shows up |
|---|---|---|
| Preparation | The company picks lead underwriters, called bookrunners, and readies audited accounts | Engagement letters, not public |
| Registration | It files a registration statement, usually Form S-1, and answers SEC staff comments | Form S-1 and S-1/A amendments on EDGAR |
| Marketing | A preliminary prospectus with a price range goes out and management pitches investors on a roadshow | The preliminary prospectus |
| Book building | Underwriters collect orders stating how many shares each investor wants and at what price | The underwriters' order book, not public |
| Pricing | Once the SEC declares the registration effective, the company and underwriters set the final price, usually the evening before trading | Final prospectus under Rule 424(b) |
| Listing and closing | Shares start trading on the exchange; the sale settles a few days later | Exchange announcement; closing press release |
| Aftermarket | Underwriters may buy extra shares under an overallotment option, and lock-ups start counting down | Later filings and releases |
The SEC's investor bulletin on IPOs points readers to the prospectus as the document to read. SEC staff comment letters on the filing are also posted on EDGAR, but not until at least 20 business days after the registration statement becomes effective.
How is an IPO priced and allocated?
Underwriters set the price from their order book, aiming for a level where demand exceeds supply, and then decide which investors receive shares and how many.
The price range in the preliminary prospectus is a starting point. If orders pile up, the range can be raised; if they are thin, the deal can be cut or postponed. Allocation is at the underwriters' discretion, and most shares go to institutions. Some deals set aside a slice for individuals: SpaceX's prospectus said certain shares would be offered to retail investors through online brokerages acting as selling group members, and it reserved 5% of the shares for employees and people chosen by its executives in a directed share program. Underwriters are paid through the gross spread, the gap between the offer price and what they pay the company. Jay Ritter's data show that from 2001 to 2025, 93.3% of IPOs raising $30 million to $160 million in 2025 dollars paid a spread of exactly 7%.
Worked example: SpaceX's IPO, priced June 11, 2026
- Base offering: 555,555,555 shares × $135.00 = $75.0 billion
- Underwriting discount: $0.90 a share, or 0.67% of the offer price, $500 million in all
- Proceeds to SpaceX before expenses: $134.10 a share, or $74.5 billion
- Overallotment option: 83,333,333 more shares, 15% of the base deal, on which the underwriters took no discount
- First trade on Nasdaq, June 12, 2026: $150.00; first closing price: $160.95
- First-day return: ($160.95 − $135.00) ÷ $135.00 = 19.2%
- Money left on the table: ($160.95 − $135.00) × 555,555,555 = $14.4 billion
Money left on the table is the first-day gain that went to investors allocated shares at the offer price instead of to the company. SpaceX's $14.4 billion tops Ritter's list of US IPOs since 1985, almost three times Visa's $5.1 billion in 2008, and exceeds the $13.11 billion left on the table by all 90 IPOs of 2025 combined. Its 0.67% spread shows how far fees fall on the very largest deals.
What is an IPO lock-up period?
A lock-up is an agreement by founders, employees and early investors not to sell their existing shares for a set time after the IPO, typically 180 days.
It is a contract with the underwriters, not an SEC rule. Shares that cannot yet be sold are sometimes called the market overhang, and the SEC's bulletin warns that a stock can fall sharply when a lock-up expires and many shares become sellable at once. Newer deals often release shares in stages. SpaceX's prospectus set a 180-day lock-up ending December 8, 2026, but allowed up to 20% of the locked shares to be sold after its first quarterly results, another 10% if the stock had closed at least 30% above $135 on five of the ten trading days up to that release, 7% slices on days 70, 90, 105, 120 and 135, and 28% after its September-quarter results. Longer, separately scheduled lock-ups for some large holders run into 2027. Shares bought through the directed share program were not locked up at all.
Do IPOs go up on the first day?
Most do, but not all: US IPOs from 1980 to 2025 rose an average 19.0% on their first day, while 29.5% closed at or below the offer price.
Jay Ritter of the University of Florida compiles US IPOs with an offer price of at least $5, leaving out SPACs, unit offers, closed-end funds, REITs, banks and American depositary receipts. His figures, updated in 2026, show how uneven the pops are:
| Period | Number of IPOs | Average first-day return | Median first-day return | Money left on the table |
|---|---|---|---|---|
| 1980 to 2025 | 9,345 | 19.0% | 7.0% | $250.1 billion |
| 1999 | 476 | 71.2% | 37.5% | $37.11 billion |
| 2023 | 54 | 11.9% | −0.5% | $1.92 billion |
| 2025 | 90 | 29.3% | 13.7% | $13.11 billion |
The average sits far above the median because a few huge jumps pull it up. Of the 9,345 deals, 16.5% closed their first day below the offer price and 13.0% exactly at it, and in 2023 more than half of the year's IPOs, 53.7%, ended day one below it. The first-day return is also measured from the offer price, which most buyers never pay: SpaceX's first trade, at $150, was already 11% above it. An order placed before the open is safer as a limit order, as stock order types explains.
How do IPO stocks perform after the first day?
On average they have trailed the market: IPOs from 1980 to 2024 returned 19.1% over three years from their first close, against a market gain about 20.5 points higher.
Ritter's long-run table, updated February 16, 2026, measures equal-weighted buy-and-hold returns, dividends included, from the first closing price to the third anniversary or delisting. Against established companies matched on size and book-to-market ratio, the shortfall narrows to 8.9 points. Results swing widely by year: the 2021 class returned −49.1% over three years, 68.6 points behind the market. These are averages of past deals and say nothing certain about any future IPO.
New listings also wait to join major indexes. The S&P 500 requires 12 months of trading after an IPO, while the Nasdaq-100's fast-entry rule admitted SpaceX on July 7, 2026, less than a month after its debut; what is the S&P 500 and what is the Nasdaq-100 cover both rules. Live quotes for large listed companies are on the stocks page.
How is an IPO different from a direct listing or a SPAC?
A traditional IPO sells shares through underwriters at a set price; a direct listing lets trading start without that sale, and a SPAC merger uses a listed shell company.
| Feature | Traditional IPO | Direct listing | SPAC merger |
|---|---|---|---|
| Who sells shares at the start | The company, sometimes with existing holders, through underwriters | Existing holders on the exchange; new company shares allowed since 2020 on the NYSE and 2021 on Nasdaq | The SPAC raises cash in its own IPO, usually at $10 a share, then merges with a private company |
| How the first price is set | Company and underwriters, from the order book | The exchange's opening auction, guided by a reference price | Negotiated merger terms, then the market |
| Underwriters' role | Buy the shares and resell them for a spread | Advise only | Underwrite the SPAC's own IPO |
| Example | SpaceX, June 2026 | Spotify, April 2018 | Hundreds of mergers since 2020 |
In a direct listing no shares change hands at the reference price, so Ritter measures the first day from the open. Spotify's reference price was $132.00; it opened at $165.90 and closed at $149.01. The SEC approved the NYSE's rule letting companies sell new shares this way on December 22, 2020, but since 2022 the companies choosing the route have mostly been very small.
SPACs boomed and faded. Ritter counts 613 SPAC IPOs in 2021, 144 in 2025 and 153 in the first three quarters of 2026. The 552 companies that completed SPAC mergers from 2012 to 2023 lost 57.7% on average over three years while the market gained 17.0%. SEC rules in force since July 1, 2024 require more disclosure about sponsor pay, conflicts of interest, dilution and the projections used to sell a merger.
What do investors misread about IPOs?
The most common misreading is treating the first-day pop as a return ordinary investors could earn, when it accrues mostly to those allocated shares at the offer price.
- Assuming the offer price. Unless a broker allocates shares in the offering, the purchase happens at the market price after the open, which can be well above the offer.
- Ignoring supply. Lock-up releases add sellable shares on known dates; the schedule is in the prospectus section on shares eligible for future sale.
- Skipping the prospectus. It sets out risk factors, how the money will be used, dilution and voting rights. SpaceX's Class B shares carry 10 votes each, against one for each Class A share sold in the IPO.
- Confusing hype with liquidity. Heavy first-day trading does not guarantee a tight bid-ask spread or steady liquidity later.
- Mistaking a famous name for a mature company. A new listing has no public trading record; blue-chip stocks earn that label over decades. How the stock market works explains the exchanges where new shares trade.