What Is an IPO and How Does It Work? A Plain-English Guide

The short answer

An IPO, or initial public offering, is the first time a private company sells its shares to the general public. The company files a registration statement and prospectus (usually Form S-1) with the SEC, investment banks called underwriters gather investor demand and help set a price, and the shares then begin trading on an exchange such as the NYSE or Nasdaq.

Historically the average U.S. IPO has risen about 19% on its first day, but roughly 30% closed flat or below the offer price, and most shares go to institutions, so regular investors usually buy after trading begins. The SEC reviews the disclosure but does not approve the investment, so reading the prospectus is up to you.

Hey everyone,

IPOs make headlines every time a famous company goes public, and this year they've made bigger ones than ever: SpaceX priced the largest IPO on record in June, and Anthropic has said it plans to follow, reportedly as soon as November. But most people have never been told what an IPO actually is, how the shares get from a private company to your brokerage account, or why the price so often jumps on the first day.

This guide walks through it from the beginning, step by step. The mechanics come from the SEC's investor bulletin on IPOs and the statistics come from University of Florida finance professor Jay Ritter's IPO database, which is the standard academic source. Both are linked at the end.

What is an IPO?

IPO stands for initial public offering. According to the SEC, it has historically referred to the first time a company offers its shares of stock to the general public. Before an IPO, a company is private: its shares are held by founders, employees, and a limited group of investors such as venture capital funds. After an IPO, the shares trade on a public exchange like the New York Stock Exchange or Nasdaq, and anyone with a brokerage account can buy or sell them.

Companies go public for a few main reasons:

• To raise money. Selling new shares brings in cash to fund growth, pay down debt, or invest in the business.
• To give early investors and employees a way to sell. Before an IPO, it's hard to turn private shares into cash. The SEC notes that early investors often see an IPO as an exit strategy.
• To create a tradable currency. Public shares can be used for acquisitions and employee pay.
• For visibility and credibility. Being public brings attention, though also scrutiny.

The trade-off is that a public company has to disclose its finances every quarter and year, answer to shareholders, and live with a stock price that moves every day.

How does an IPO work, step by step?

The process is highly regulated. Here is the typical path:

1. Pick the underwriters. Underwriters are investment banks that manage and sell the IPO. A big offering typically has a lead bank or two plus several others. For SpaceX, for example, Goldman Sachs and Morgan Stanley led.
2. File a registration statement. Under federal law, a company can't lawfully offer or sell shares unless the sale has been registered with the SEC or an exemption applies. The company files a registration statement, typically on Form S-1. Most of it is the prospectus, the offering document describing the business, the risks, and the terms. Companies can often submit a draft privately first and make the filing public later. SpaceX's S-1 became public on May 20.
3. The SEC reviews it. SEC staff check that the disclosures meet the rules and often ask for revisions. The SEC is explicit about one thing: its review is not a guarantee, and declaring a filing "effective" is not an approval of the IPO's merits or a sign that the information is complete or accurate. Responsibility for accurate disclosure lies with the company and those who prepare the filing.
4. The roadshow and order book. The underwriters collect "indications of interest" from big investors, building what's called the order book: how many shares each investor wants and at what price. They use this, along with valuation analysis, to recommend a price.
5. Price the offering. The company makes the final call, with the underwriters' advice. The SEC describes the price as determined by "a mix of market conditions, analysis and negotiation." SpaceX priced at $135 a share on June 11.
6. Allocate and start trading. The underwriters distribute shares, mostly to institutions, and the stock begins trading on an exchange, usually within a day or so. SpaceX began trading on Nasdaq under the ticker SPCX on June 12.
7. After the IPO. The company starts filing quarterly and annual reports. Underwriters may support the price for the first few days. Insider shares stay locked up for a period, and later become eligible to sell.

After the registration is effective, the company files a final prospectus, which includes the final price. You can find these filings for free on the SEC's EDGAR database.

Who sets the price, and why do IPO stocks often jump on day one?

Pricing is a balancing act between competing interests. The SEC explains that the company wants a high price to raise more money, and the underwriters also like a higher price because their pay is a percentage of it. But the underwriters also have to sell all the shares to their clients, so they want a price that looks attractive. Underpricing an IPO creates a discount for the first investors and helps sell the whole offering, but it also means the company may have left money on the table if the stock jumps.

That's why first-day gains are common. Ritter's data covering 9,345 U.S. IPOs from 1980 through 2025 shows an average first-day return of about 19%. But the average hides a lot. The median first-day return was 7.0%, meaning a typical IPO rose less than the headline average, and about 16.5% of IPOs closed their first day below the offer price while another 13.0% closed exactly flat.

First-day outcomes of U.S. IPOs, 1980-2025

SpaceX fits the pattern. It priced at $135, traded higher on day one, and by most reports closed at about $161, up roughly 19%, which is close to the long-run average. But a first-day gain isn't permanent. On October 16, SpaceX closed at $146.03, about 9% below its first-day close, though still about 8% above the IPO price, and the Associated Press reported it was down about 35% from its post-IPO peak.

The SEC also points out a quirk that contributes to early surges: the number of shares trading at first is small. Founders, early investors, and employees generally can't sell right away, and underwriters discourage "flipping," so the supply of shares in the first days can be limited relative to demand.

Can a regular investor buy shares in an IPO?

The SEC says there are two ways. The first is to be a client of one of the underwriters and be offered shares directly at the IPO price. But underwriters usually distribute most of the shares to institutional and high-net-worth clients such as mutual funds, hedge funds, and pension funds, so for the typical investor, getting a direct allocation in a popular IPO is rare.

The second way, and the more common one for individuals, is to buy the shares in the open market once trading begins, through an ordinary order with your broker. Some brokerages do offer eligible customers access to IPO shares, but allocations are limited and depend on the broker's rules, so check what yours offers.

Buying once trading starts means paying the market price, which may already be well above the offer price. The SEC warns that the offering price "may bear little relationship to the trading price" and that it's not unusual for the price shortly after an IPO to be well above or below it.

As for "flipping," or selling IPO shares right away, the SEC notes it's not prohibited by federal securities law, but underwriters can refuse to allocate future IPO shares to customers who flip.

What are lock-ups, the greenshoe, and the quiet period?

• Lock-up. A lock-up agreement is a promise by existing shareholders, such as founders, early investors, and employees, not to sell their shares for a set period after the IPO, which the SEC says is typically 180 days. When it expires, a large number of shares can become eligible to sell at once, and the SEC notes the share price may decline significantly if that happens. This unsold supply is sometimes called "market overhang."
• Greenshoe (over-allotment option). Underwriters usually have the right to sell extra shares, commonly up to about 15% more than the base deal, if demand is strong. They can also use it to help steady the price after the IPO. SpaceX's offering included a 15% greenshoe.
• Price support. The SEC says underwriters can support the trading price in the first few days, for example by buying shares, to keep it from falling too far below the offer. Once that support ends, the price may decline significantly below the offering price.
• Quiet period. Around an IPO, securities law limits what the company and the banks can say publicly. It exists so that investors rely on the official prospectus and not on hype.

How much does an IPO cost, and who gets paid?

The main cost is the underwriters' fee, called the gross spread. Ritter's data shows 7% is the standard on moderate-size deals: of 1,141 IPOs raising $30 million to about $160 million between 2001 and 2025, 93.3% paid exactly 7%. Fees fall for larger deals. IPOs raising $1 billion or more averaged a spread of about 4.4%, and some giant deals paid far less: Visa in 2008 paid 2.8% on a $17.9 billion IPO, General Motors 0.75% on $15.8 billion, Facebook 1.1% on $16 billion, and Uber 1.3% on $8.1 billion.

Average underwriting fee (gross spread) by deal size, 2001-2025

A gross spread of 7% on a $100 million offering is $7 million, and the banks split it among underwriting, selling, and managing the deal. Companies also pay legal, accounting, and listing costs.

Are there other ways to go public?

The traditional IPO is the most common route, but not the only one:

• Direct listing. The company lists existing shares on an exchange without underwriters selling new shares to raise money. Insiders can sell directly into the market, and the opening price is set by supply and demand.
• SPAC merger. A "special purpose acquisition company" is a shell company that raises money in its own IPO and later merges with a private business, which then becomes public. Ritter tracks both direct listings and SPACs separately from traditional IPOs.
• Auction IPOs. A few companies have used auctions to set the price, though they're rare.

The shares you buy are the same either way. What differs is how the company gets listed and how the price and allocations are set.

How do I read an IPO prospectus?

Because a newly public company has no track record of public reporting, the prospectus is often the best source of information. The SEC recommends reading it before investing and points to sections worth special attention:

• Risk Factors. What management thinks could hurt the business or the investment.
• Use of Proceeds. What the company plans to do with the money. Check how much goes to the company and how much to selling shareholders, who receive the proceeds from the shares they sell.
• Management's Discussion and Analysis and the financial statements. How the numbers have changed and why.
• Dilution. The gap between what you'd pay and what founders and early investors paid.
• Principal and Selling Shareholders, and Shares Eligible for Future Sale. Who owns what, and how much supply could hit the market when lock-ups end.
• Description of Capital Stock. Whether there are multiple share classes. Dual-class structures give founders extra voting power, which can limit what public shareholders can influence.

For a worked example of how to read the numbers in a draft filing, see our post on Anthropic's leaked prospectus, and for why standard valuation metrics struggle with companies that have no profit yet, see our P/E ratio post. Our free ratios course covers the key numbers you'll meet in a filing.

What are the risks of investing in IPOs?

The SEC puts it plainly: by their nature, IPOs can be risky and speculative. The main reasons:

• Limited track record. The company has no history of public reporting, and the SEC notes that a high-profile IPO isn't always an early-stage opportunity.
• Hype and price. Heavy demand can push the price far above what the business justifies, especially when few shares are available to trade.
• Supply arrives later. Lock-up expirations and underwriter price support ending can both weigh on the stock.
• Insiders and institutions get the best access. Most shares go to big clients at the offer price, while individuals often buy after the first-day move.
• Disclosure phase-ins. The SEC notes that "emerging growth companies," generally those under $1 billion in revenue, have some disclosure and audit requirements phased in over time.

None of this means IPOs are bad investments, only that they deserve extra homework and a modest position size. A diversified portfolio is the main protection.

Key takeaways

• An IPO is a private company's first sale of shares to the public, managed by underwriters and registered with the SEC.
• The SEC reviews disclosure but doesn't approve the investment. Reading the prospectus is on you.
• The price is negotiated, and first-day jumps are common but not guaranteed: about 70% of IPOs close above the offer on day one, and about 30% close flat or lower.
• Most shares go to institutions. Regular investors usually buy after trading starts, at the market price.
• Watch lock-ups and supply. The price can change when insider shares become eligible to sell.

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Sources

• U.S. SEC Office of Investor Education and Advocacy: Investor Bulletin, Investing in an IPO
• Jay R. Ritter, University of Florida: Initial Public Offerings: Updated Statistics (Oct 2026)
• Jay R. Ritter, University of Florida: Initial Public Offerings: Underwriting Statistics Through 2025 (May 2026)
• SEC EDGAR: Search company filings, including S-1 registration statements and prospectuses
• Nasdaq: SpaceX (SPCX) launches historic IPO
• Forbes: SpaceX opens at $150 after largest IPO ever (June 12, 2026)
• Wikipedia: Initial public offering of SpaceX (timeline and first-day figures, as summarized from news reports)
• Associated Press (via WSLS): SpaceX's Oct. 16 close and decline from its peak (Oct 19, 2026)