CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US English

What is an IPO?

Chapter 1: Intro

An IPO is the first time that a company offers shares (or ‘floats’) to the public on a stock exchange.

It stands for ‘Initial Public Offering’, but you’ll often see it short-handed to ‘going public’ which has the same meaning.

Which exchanges are we talking about? They could include the London Stock Exchange, the New York Stock, Euronext, or the Hong Kong or Shanghai Stock Exchanges (and there are many others). But unless it’s a large business, it will likely be an exchange that specialises in smaller companies like London’s Investment Market (AIM) for example.

Chapter 2: Why IPO?

There are many reasons. The big one is simply to raise more capital by issuing shares to the public. Usually that’s to fuel expansion – either through building its existing business or acquiring others.

But there are other reasons. One is to spread the risk of its business among a broader range of investors, beyond its founders or initial backers.

Another could be because the early shareholders in the business want to cash out. Say a private equity company has invested in a business but now wants to cash in its investment; it can do so through an IPO. It’s a neat way to exit the business.

Chapter 3: How do you manage an IPO?

A company that is planning an IPO will often start preparing for it many months – and sometimes years – in advance. That’s because it’ll need to ensure its accounts, management and internal procedures will comply with the rules of the stock exchange on which it will be listed.

Advised by a stockbroker, securities company or investment bank that specialises in and is authorised to carry out flotations, the company and its advisors will first prepare a sales document or ‘prospectus’. This will set out all of the details of the company and is the IPO sales document.

The company then announces its intention to list in newspapers or on the web and through its advisers. Often those offered the shares will be institutions such as pension funds, insurance companies and investment funds.

They and investment banks may also underwrite the shares – which means they agree to buy the shares back if they fail to sell during the IPO process. Its advisors will look to pitch the shares at a price at which they will be sure to sell, so that the underwriters will not have to buy them in. But they sometimes get it wrong.

Chapter 4: What happens next?

Life isn’t the same again. After an IPO, the company lists its shares on its chosen exchange. This means it will also need to accept a higher level of public scrutiny and media interest – for better or worse!

If it is successful, the shares will increase in value – and all the shareholders will make a capital gain. These often include the company’s management and initial founders – and sometimes staff as well, if they’ve also bought or been given shares at the time of the IPO.

It doesn’t always go well. Sometimes the price falls. And sometimes, particularly with small companies, its investors show no great interest in buying and selling the shares – which are then said to be ‘illiquid’. That’s a risk that every business has to take if it goes public.

By the way, just in case you think that only small companies make IPOs, here are some big numbers to consider: in 2014 the Chinese web shopping and services Ali Baba Group carried out the largest IPO of all time. It raised $25 billion. This dwarfed even Facebook, which came to market in 2012 and raised $16 billion.

Now you know….

What an IPO stands for ✔
Why companies float ✔
How IPOs are managed ✔
What can happen to shares prices ✔

Test yourself

An IPO is the first time that...

the shares of the company are available on the secondary market
a company reaches an investment bank and declares that it wants to go public
a company offers shares to the public on a Foreign Exchange
a company offers shares to the public on a Stock Exchange
Next lesson

What are shares?

Looking for more?

computer
Education Hub

You’ll find everything you need to know here; from how-to guides to investment strategies.

figure
computer
Trading Guides

Our in-depth guides will provide you some insights into the wide variety of financial instruments, their unique features and how to use them in your trading portfolio.

Trading Glossary

1988

That's the number of terms in our glossary.


Do you know your CFDs from your IPOs or ETFs? Remove the mystery with our definitions glossary.

See all

Term of the day

Capital

Capital is a broad term that can be used in a number of ways. Yet in this article we will focus on the definition of capital in financial markets, the so-called business capital, used by companies to expand and operate their business. ...

Read more
The most common word

Broker

A broker is the intermediary between an investor or trader and securities exchange. Brokers are the facilitators of liquidity in the financial system, and key players in the markets.  Here we take a look at the broker definition in...

Read more

Still looking for a broker you can trust?

Join the 630,000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading