IPOs

Background

An initial public offering, or IPO, is the process of a private company becoming public. In an IPO, a company puts up shares of the company on the stock market for the public to purchase.

IPOs often have all the pomp and circumstance of a graduation ceremony, as they are one of the biggest milestones a company can achieve. From Apple in 1980 to Reddit in 2024, every public company has gone through an IPO at some point.

How It Works

If a company wants to go public, it must participate in a lengthy IPO process—which can take months or even years.

This includes filing a registration form (called the S-1 or prospectus—see Airbnb’s here) with the US Securities and Exchange Commission. S-1s reveal previously private details about companies to the public, often for the first time. Any company that wants to IPO also must meet all the SEC and exchange listing requirements. You can explore any public company’s filings here.

To begin the process, a company hires investment bankers (who earn roughly 7% of the IPO’s gross proceeds) to help set the organization’s target valuation range—an estimate of how much the company is worth—and schedule an IPO date. From there, the bankers market the IPO to hedge funds and other large potential investors.

The bankers make the final decision on who to sell the shares to by the night before the company’s IPO date. They’ll receive hundreds of bids and decide which of these bidders will make the best group of initial investors—they’re usually looking to balance price and the desire for longer-term investors who won’t sell their shares on day one. Typically, the bankers want the shares to go up in price during the first day of trading, so they tend to underprice their value going in.

The IPO "prices” that night, then hits the market the next day where anyone—including individual or retail investors—can buy shares. See a calendar of upcoming IPOs here.

The amount of money the average IPO raises varies significantly each year. In 2021, the average IPO raised roughly $354M, whereas in 2022, when the IPO market had cooled, the average was about $98M.

History

The Dutch East India Co., a spice company, became the first company to go public when it offered its shares to the public on the Amsterdam Stock Exchange in the 1600s.

Companies didn’t begin publicly trading in the US until the 1790s, after the first US stock exchange, the Philadelphia Stock Exchange, was created. The largest stock exchange in the US today—the New York Stock Exchange—started two years later. The Bank of New York was the first company traded on the NYSE.

Since then, thousands of companies have traded publicly on US stock exchanges. In 1996, US exchanges hit their peak, with more than 7,000 companies trading publicly in the market. Today, that number has been cut nearly in half.

Pros and Cons

Transitioning from a private to a public company allows an organization to more easily raise a significant amount of capital. This helps the company expand, giving it money to invest in new ventures, hire more staff, or pay off debts.

However, when a company goes public, it can’t directly control its ownership anymore. If someone has enough money to purchase a large number of shares, they’ll own a major portion of the company. Plus, going public means a company has to abide by strict regulations and disclose its business decisions to the world via expensive quarterly earnings reports.