What is an IPO? How a company goes public, explained
An IPO, or initial public offering, is the first time a private company sells its shares to the public and lists them on a stock exchange. After an IPO, anyone with a brokerage account can buy and sell the company’s shares on the open market, and the company has to publish regular financial reports.
IPOs are back in the headlines. AI developer Anthropic is expected to list on the Nasdaq this month in one of the largest offerings on record, while payments company Stripe is one of the most watched private companies that has not yet filed. This guide explains how the process works, using both as live examples.
What is an IPO in simple terms?
Before an IPO, a company’s shares are owned by a small group: its founders, employees and private investors such as venture capital funds. The shares cannot be traded freely. An IPO opens that ownership up. The company, and sometimes its existing shareholders, sell a slice of the business to new investors, and from then on the shares trade publicly every day the market is open.
The US Securities and Exchange Commission’s investor education site describes an IPO as a company’s first sale of stock to the public (see the Investor.gov glossary). In other countries the same event may be called a “flotation” or “listing”, but the idea is the same.
Why do companies go public?
To raise money. Selling new shares brings in cash the company can spend on growth. Anthropic, for example, is offering 825 million shares at $70 to $78 each, which would raise between $57.75 billion and $64.35 billion, CNBC reported. Training and running large AI models takes enormous amounts of computing power, so that capital has a clear use.
To give early backers a way out. Employees and investors who have held shares for years can eventually sell them on the open market.
To gain a public currency and profile. Listed shares can be used to pay for acquisitions and reward staff, and being listed raises a company’s profile with customers.
The trade-off is scrutiny. Public companies must report results every quarter, disclose risks and answer to a much wider group of shareholders. That is one reason some companies, like Stripe, have stayed private for a long time and raised money through private funding rounds and employee share sales instead. Our Stripe IPO update explains where that stands.
How does a company go public, step by step?
1. Hire the banks. The company picks investment banks, called underwriters, to run the deal. For Anthropic, Morgan Stanley and Goldman Sachs are the lead underwriters.
2. File with the regulator. In the US, the company files a registration statement, usually Form S-1, with the SEC. It includes a prospectus with audited financial results, risks, plans for the money and details of who owns what. Anthropic’s amended S-1 is public on the SEC’s website, and anyone can read it.
3. Set a price range and market the shares. The company and its banks set an initial range and pitch the shares to large investors in a “roadshow”. Investors tell the banks how many shares they want and at what price, a process called book building.
4. Price the deal. Usually the evening before trading begins, the final price is set based on demand. Strong demand can push the price to the top of the range or above it, while weak demand can force a cut or a delay.
5. Start trading. The shares begin trading on the exchange the next morning. The first trade, the “opening price”, is set by buyers and sellers in the market and can be very different from the IPO price.
Can ordinary investors buy shares in an IPO?
Sometimes. Most IPO shares traditionally go to large institutions such as pension funds and asset managers. Retail investors usually get a small slice, typically 5% to 10% of a deal. Anthropic is an exception: up to 20% of its shares are expected to go to individuals through brokers including Charles Schwab, Fidelity, Robinhood, SoFi and E*Trade. Our Anthropic IPO explainer has the dates, price range and how its allocation works.
When a popular IPO is oversubscribed, meaning investors want far more shares than are on offer, brokers scale back requests. You may receive fewer shares than you asked for, or none. Most investors simply buy once the shares start trading, at whatever the market price is.
What are the risks of buying an IPO?
Volatility. New listings can swing sharply in their first days and weeks, because there is no trading history and the price is still being discovered.
Limited track record. Investors have fewer years of public financial results to judge than they would with an established company.
Lock-up expiries. Insiders and early investors usually agree not to sell for a set period after listing. When that lock-up ends, extra shares can hit the market. The SEC advises investors to check whether insiders have a lock-up and when it expires, as explained on Investor.gov.
None of this makes IPOs bad investments. Some companies grow strongly for years after listing. AI chipmaker Cerebras, for instance, is now reporting results as a public company, as covered in our Cerebras earnings report. It simply means the first weeks of trading carry more uncertainty than usual.
Are there other ways to go public?
Yes. In a direct listing, a company lists its existing shares without selling new ones or using underwriters to set a price. In a SPAC deal, a company merges with a listed shell company created to buy a private business. The traditional IPO remains the most common route for large companies because it raises new money and gives banks a role in finding buyers.
IPO FAQ
What does IPO stand for?
IPO stands for initial public offering: the first time a company offers its shares to the public.
What is the difference between the IPO price and the opening price?
The IPO price is what investors who receive an allocation pay, set by the company and its banks the night before trading. The opening price is the first price at which the shares trade on the exchange, set by market demand. A big gap between the two is often called a “pop” when the opening price is higher.
How long after an IPO can insiders sell their shares?
It depends on the lock-up agreement disclosed in the prospectus. Lock-ups commonly last several months, but the exact terms vary by company, so always check the filing.
Is Stripe going public?
Not yet. Stripe has not filed a registration statement with US regulators, and there is no confirmed IPO date. Its latest valuation, $159 billion, comes from an employee share sale earlier this year.
For more explainers like this one, browse our guides section.
Trade the markets you read about. Open a free WiseProp Trader account, with no deposit.
This article is for education and information only and is not financial advice. Figures are as reported by the sources linked above.
