Business · Explainer
What actually happens in an IPO
A listing is a financing event wrapped in a marketing exercise. The mechanics decide who captures the first-day move.
The short answer
- Bookbuilding sets the price by collecting institutional demand, not by auction.
- A first-day pop is a transfer of value from the company to allocated buyers.
- Lock-ups and free float shape trading long after the bell.
In a traditional initial public offering, the company and its selling shareholders offer shares through underwriting banks. Those banks canvass institutional investors, build a book of demand at different prices, and recommend a final price and allocation.
Pricing is negotiated, not discovered
Because allocation is discretionary, the price is set where the book is comfortably covered rather than where the last marginal buyer sits. A deliberate discount improves aftermarket performance and rewards the institutions the bank wants in the register — at the issuer's expense.
The mechanics worth knowing
- Greenshoe: an over-allotment option letting underwriters stabilise the price after listing.
- Free float: a small float can produce violent moves on modest volume.
- Lock-up: insiders are typically restricted from selling for a defined period; its expiry is a scheduled supply event.
- Dual-class shares: economic ownership and voting control can be deliberately separated.
Read the prospectus backwards
Risk factors and the use-of-proceeds section carry more information per line than the strategy narrative. So does the related-party disclosure, which shows who is being paid what to bring the company to market.
Sources
- Investor bulletin: IPOs — U.S. Securities and Exchange Commission
- Going public — U.S. SEC Office of the Advocate for Small Business Capital Formation
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