How an IPO works
An IPO is a sale, timed by the seller, who knows more than you do. That is not cynicism, it is the structure.
Understand who wins on IPO day, and why it is usually not the person buying at the open.
How an IPO works works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
Who the first-day pop actually enriched
If the shares open 40% above the offer price, that 40% is money the company could have raised and did not. It went to whoever was allocated shares at the offer, which was not you.
- 1
The company hires banks to sell its shares
The banks underwrite the offering: they commit to selling a block of shares and take a fee, typically several percent. Their client is the company, and increasingly, their relationships are with the institutions they will allocate shares to.
- 2
A price is set behind closed doors
During the roadshow, institutions indicate what they would pay. The bank builds a book of demand and sets a price. Notice that the general public is nowhere in this process; the price is agreed between the seller and a small number of large buyers.
- 3
The first-day pop is not good news for the company
If the shares open 40% above the offer price, that 40% is money the company could have raised and did not. It was transferred to whoever was allocated shares at the offer price, which was not you.
A big pop is usually reported as a triumph. From the company's point of view it is a mispricing that cost it a fortune.
- 4
Then the lock-up expires
Insiders are barred from selling for 90 to 180 days. When that window opens, a large volume of shares can suddenly become sellable, and prices frequently come under pressure on a date that was known in advance.
You can explain who the first-day pop actually enriched.
Read next
An IPO is a sale, timed by the seller, who knows more than you do. That is not cynicism, it is the structure.
Newly listed companies, and the lock-up dates that are about to make a lot of shares sellable.