IPO (initial public offering)

In an initial public offering, a private company sells shares to outside investors and has them admitted to trading on a stock exchange. It usually hires investment banks to value the business, prepare a prospectus describing the company and its risks, gauge demand from large investors and set the offer price. In most major markets the offering document is reviewed by or filed with the securities regulator. The shares sold can be newly created, raising money for the company, or existing shares sold by founders and early backers, in which case the money goes to them. Insiders are often barred from selling more shares for a period after listing, known as a lock-up.

IPOs attract attention, but they carry particular risks for ordinary investors. The company and its advisers choose the timing and generally want the highest price they can get, and insiders know far more about the business than outside buyers. Newly listed companies have a short public track record, and early price movements can be large in either direction. Retail investors often receive only a small allocation of popular offerings, or can buy only once trading begins, possibly at a much higher price. Some companies list by other routes, such as a direct listing or a merger with a special purpose acquisition company.