What is an IPO?

You hear about IPOs constantly — a hot startup "going public," a founder ringing the opening bell. But what’s actually happening beneath the headlines is a fairly mechanical process, and once you see it, the news makes a lot more sense.

Primary vs secondary market

The key distinction is where the money goes. The primary market is where new shares are issued and the company itself raises capital — an IPO is a primary-market event. The secondary market is everything after: investors trading those existing shares among themselves on a stock exchange. Crucially, when you buy a share on the exchange the day after an IPO, the company gets none of that money — you’re buying from another investor, not the company.

Who actually gets the shares

Despite the retail excitement, most IPO shares don’t go to the public on day one. They’re allocated — mainly to big institutions like funds and pension schemes, sometimes with a smaller slice reserved for retail investors. Those allocations are decided by the underwriters, not bought freely on an exchange. Ordinary investors usually only get to buy once trading opens on the secondary market.

The bookbuild: setting the price

How does a company decide what its shares are worth on day one? Through a process called bookbuilding. The underwriters canvass investors across a price range and collect their indications of demand, building a "book." That book tells them where real appetite sits, which lets them set the final offer price and decide who gets what. Strong demand can push the price to the top of the range — or beyond it.

Underwriters: the banks in the middle

Underwriters are the investment banks that run the whole offering. They commit to buying or placing the new shares with investors — taking on the risk that the issue might not fully sell — in exchange for fees. They also advise on pricing, timing, and the marketing campaign (the "roadshow," where management pitches the company to potential investors).

The lock-up period

One detail that catches investors out: the lock-up period. For a set time after the IPO — commonly 90 to 180 days — insiders and early investors are contractually barred from selling their shares. This stops a flood of selling right after listing and keeps the market orderly. Watch out when a lock-up expires, though: share prices sometimes wobble as those early holders are finally free to sell.