Initial public offering (IPO)

The event by which a private company becomes a listed one. Shares are offered, either newly issued by the company to raise capital or sold by existing holders, a prospectus is published setting out the business and its risks, and investment banks acting as underwriters collect indications of interest from institutions. A price, or a range narrowed to a price, is fixed shortly before dealing begins, and the shares are admitted to an exchange the next morning.

How the price is set varies. Book building, where the underwriters gather demand and choose the level, is the common method, and allocation under it is discretionary rather than proportional. A fixed price offer sets the level in advance, an auction lets bids determine it, and a direct listing dispenses with the offer altogether and simply admits existing shares to trading. Insiders are normally bound by a lock-up preventing them from selling for a stated period after the listing, and the expiry of that period is itself a scheduled supply event.

Two things are regularly misunderstood. The offer price is the price paid by allocated buyers, not the price at which the shares open in the market, and the gap between the two is the whole subject of a long running academic argument about whether offers are systematically underpriced and, if so, at whose expense. Separately, the free float immediately after a listing is often small and the trading history is empty, which is why a contract for difference on a newly listed share is commonly unavailable until a stated period of trading has produced a reliable price.