Stock market basics · Beginner

What Is an IPO

The first-day pop is a pricing artefact, not a verdict. Here is who gets the offer price, who pays the open, and which dates in the prospectus matter.

Last reviewed 15 September 2026 by the MarketPro research desk · Editorial policy

In short

An initial public offering is the first sale of a company’s shares to public investors, after which the stock lists on an exchange. Underwriting banks set an offer price and allocate shares to institutions before trading begins. Retail buyers transact only once the exchange opens, often well above the offer price. The gap between the two, the first-day pop, reflects how the offering was priced rather than how good the business is.

What to remember

The offer price goes to allocated institutions. The public buys at the opening print, which on a hot deal can be 40% higher.
A large first-day pop means the offering was priced below market demand, not that the stock is strong.
The lock-up expiry, usually 90 to 180 days out, is a scheduled supply event disclosed in the prospectus. It has a date. Look it up.
Early floats are small, so daily ranges of 8% or more are normal. That has to shrink the position, not just the conviction.

Lesson 8 of 18 in Stock market basics

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An IPO is a company selling to the public for the first time

An initial public offering is the process by which a private company sells shares to outside investors and lists them on an exchange. It converts illiquid private ownership into tradable stock, raises capital for the business, and gives early backers and employees a route to sell. From the reader’s side, it is the first date on which a company that previously reported to nobody in particular begins reporting to everyone.

The headline number people remember is the first-day move. The number that decides whether an IPO was a good purchase is the one three years later, and those two figures are frequently unrelated.

Who gets the $32 price and who pays $46

The mechanics of allocation explain the first-day pop better than any theory about demand.

A company works with underwriting banks to price the offering. Suppose it sells 20 million shares at $32, raising $640 million, from which the underwriters take a fee of around 7%, or roughly $45 million, leaving about $595 million for the company. Those 20 million shares are allocated at $32 to institutions and selected clients before trading opens.

When the stock opens on the exchange it trades at $46, up 44%. The allocated institutions are immediately up $14 a share, or $280 million collectively. A retail buyer placing an order on the first morning does not receive $32. They pay $46, which is the first price at which the general public can transact at all.

That gap is not a scandal, it is the structure. Understanding it reframes the first-day pop: it is not evidence the stock is strong, it is evidence the offering was priced below what the open market would bear, and everyone who reads the pop as validation is buying from the people who benefited from it.

Underwriters, the greenshoe and the lock-up

The underwriters buy the shares from the company and resell them, taking price risk and a fee. Their incentive is a successful placement, which usually means pricing at a modest discount to expected demand.
The greenshoe option lets underwriters sell up to 15% more shares than planned and buy them back in the market if the price sags, which is a legal stabilisation mechanism that supports the price in the opening weeks.
The lock-up prevents insiders and early investors from selling for a set period, usually 90 to 180 days. When it expires, a large block of supply becomes eligible to hit the market at once.

The lock-up expiry is the scheduled event most new investors miss. It is disclosed in the prospectus, it has a date, and it is the moment the float can multiply.

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The prospectus lines worth reading first

The registration document runs to hundreds of pages, and three sections carry most of the information. Use of proceeds says whether the money funds the business or pays off existing shareholders. Risk factors are written by lawyers to be complete, so the specific ones near the top, rather than the boilerplate, tell you what management genuinely worries about. And the share structure section shows whether founders hold a class with ten votes per share, in which case your vote is decorative.

Then check the financials for the trend rather than the level. A company growing revenue 60% with widening losses is a different proposition from one growing 60% with narrowing losses, and the prospectus shows three years so the direction is visible.

Why the first six months are the hardest to judge

Newly listed stocks lack the things that make analysis possible. There is no multi-year record of guidance against delivery, so you cannot tell whether management forecasts accurately. There is a limited price history, so technical levels are mostly absent. Analyst coverage begins only after a quiet period, and the initiating analysts work for the underwriters.

The float is also small in the early months, often 10% to 20% of shares outstanding, which makes the stock move more violently than its market cap suggests. Double-digit daily moves on no news are normal, and they are a liquidity artefact rather than information. Position sizing has to reflect that: the same dollar risk demands a much smaller position when the daily range is 8%, which is the calculation the position size calculator exists to do.

A sane way to approach a listing you are interested in

Waiting costs less than people assume. Two quarterly reports give you a first read on whether management’s numbers land where they said. The lock-up expiry clears the supply overhang or shows that insiders are selling. The second earnings call gives you guidance you can score later.

If you do buy early, size it as the speculative position it is, decide the exit before the open rather than during it, and treat the opening price as a piece of information about demand rather than about value. The risk management guide covers how to fit a position like that into an account without letting one name dictate the year, and the glossary defines the offering terms.

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Written and reviewed by the MarketPro research desk

MarketPro is a trading-signal and trading-education app operated by Harajuku Holdings LTD (Cyprus). Our signal desk publishes and tracks every trade idea in-app, and every page here is checked against the app's live behaviour before publishing. Last reviewed 15 September 2026. How we produce signals and content · About MarketPro

FAQ

What Is an IPO: questions

Can retail investors buy shares at the IPO price?

Rarely, and only through brokers that receive an allocation from the underwriting syndicate and pass part of it to clients. The large majority of retail orders execute at the opening price on the exchange, which on an in-demand offering can be substantially above the price institutions paid hours earlier.

Why do IPO stocks often fall after a few months?

Two structural reasons. The lock-up period expires after roughly 90 to 180 days, releasing insider and early-investor shares onto a market that had been trading a small float. And underwriter stabilisation, which supports the price in the opening weeks through the greenshoe mechanism, has long finished by then. Neither is a judgement on the business.

What should I read in an IPO prospectus?

Start with use of proceeds, which shows whether the money funds the company or cashes out existing shareholders. Then the specific risk factors near the top rather than the boilerplate. Then the share class structure, which reveals whether founders hold supervoting shares. Finally the three-year financials, read for the direction of margins rather than the level.

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