What Is an Initial Public Offering (IPO)?

An Initial Public Offering (IPO) is the first time a private company sells its shares to the general public. For a long-term retail investor in Europe, an IPO is often a visible moment: a familiar name appears on a stock exchange, and suddenly you can buy a slice of that business through your broker. But the mechanics, risks and rewards differ from buying an established, widely traded company. This guide explains the process from first principles, using concrete examples and publicly available data.

Most European investors access IPOs indirectly. You may hear about a new listing on a news feed, read a prospectus summary, and then decide whether to buy on the open market. Understanding what happens before and after the first trading day helps you separate the marketing around an IPO from the fundamentals of the business itself.

What is an IPO?

At its core, an IPO is a primary market transaction. A private company creates new shares and sells them to outside investors in exchange for cash. Before the IPO, ownership is concentrated among founders, family members, employees and early-stage investors such as venture capitalists or business angels. After the IPO, those same shares — now freely tradable — can be bought and sold by anyone with a brokerage account on a public exchange.

Consider a simple example. A software company in Bucharest has 10 million shares outstanding, all held privately. The founders want to raise €50 million to fund product development and international expansion without taking on bank debt. They hire an investment bank to underwrite an IPO, issue 2 million new shares, and sell them to institutional investors at €25 per share. The company receives €50 million in fresh capital; the founders still hold the remaining 8 million shares. From that day, the 2 million new shares can be traded on the stock exchange. The company has transitioned from private to publicly traded ownership.

Why companies go public

The decision to go public is strategic, not automatic. Companies typically pursue an IPO for several reasons.

Raising capital without debt. An IPO provides equity funding that does not need to be repaid with interest. This is especially valuable for capital-intensive businesses or those with long development cycles, such as biotech firms or industrial manufacturers. The raised cash can fund research and development, build factories, or finance geographic expansion.

Liquidity for early stakeholders. Founders, employees and early investors often hold illiquid shares that cannot be easily sold. An IPO creates a public market for those shares, allowing insiders to diversify their wealth over time. For employees with stock options, a listing can make those options meaningful and tradable.

Access to public markets for future fundraising. Once a company is publicly listed, it can issue additional shares in follow-on offerings or sell convertible bonds, often at more favourable terms than a private placement. This "equity pipeline" is a long-term advantage of being a public company.

Brand visibility and credibility. A listing on a recognised exchange can enhance a company's reputation with customers, suppliers and regulators, although this is a secondary benefit rather than a financial one.

A brief history of IPOs

The modern IPO traces its origins to the Dutch East India Company, which in the early 1600s offered shares of its trading venture to the general public on the Amsterdam Stock Exchange. This was the first time a company sold ownership stakes to a broad pool of investors, creating a continuous secondary market for those shares.

Over the centuries, IPO activity has followed cycles of enthusiasm and caution. In the 1980s, the average first-day return on US IPOs was around 7%. During the 1990–1998 period, that figure rose to nearly 15%. The internet bubble of 1999–2000 drove average first-day returns to 65%, reflecting extreme speculative demand. After the bubble burst, returns fell back to about 12% during 2001–2003.

More recently, the rise of technology "unicorns" — private companies valued at over $1 billion — has reshaped the IPO landscape. Companies now often wait longer before going public, reaching the IPO stage with valuations that would have been unusual in earlier decades. The 2008 financial crisis caused a sharp slowdown in IPO volume, and activity has continued to fluctuate with broader market conditions.

The IPO process step by step

The path from private company to listed stock follows a structured sequence.

Selecting underwriters

The process typically begins with the company choosing one or more investment banks to act as underwriters. The underwriters manage the sale: they help set the terms, coordinate due diligence, and distribute shares to investors. The choice of underwriter is a strategic decision, as the bank's reputation and client relationships influence the IPO's success.

Due diligence and regulatory filings

Once underwriters are appointed, the company prepares a registration statement. In the United States, this is typically Form S-1, which includes a prospectus — a detailed document describing the business, financial condition, management team, and the terms of the offering. The prospectus must contain audited financial statements and a thorough discussion of risk factors. The SEC reviews the filing, often requesting revisions before declaring the registration effective.

The roadshow

Before setting the final price, the company and its underwriters conduct a roadshow: a series of presentations to institutional investors such as mutual funds, pension funds and hedge funds. The goal is to gauge demand and collect indications of interest — non-binding expressions of how many shares investors would like to buy and at what price. The underwriters use this feedback to recommend a price range, but the issuer ultimately determines the final IPO price.

Price setting and allocation

On the evening before trading begins, the underwriters and issuer agree on the final offer price. Shares are then allocated primarily to institutional and high-net-worth clients. Individual investors rarely receive shares directly at the offering price; the more common route is buying in the public market after the first day of trading.

Listing and trading

Once the shares begin trading, the company is subject to ongoing disclosure requirements. In the US, this means filing quarterly reports on Form 10-Q and annual reports on Form 10-K. European exchanges have equivalent rules. The transition from private to public company has begun.

The diagram below summarises the key stages of the IPO process.

Key documents: the S-1 and prospectus

The prospectus is the most important document for any investor considering an IPO. It is part of the registration statement filed with the regulator and contains the information you need to evaluate the offering.

What to look for in a prospectus

• Business description. How does the company make money? What products or services does it offer, and what is its competitive position?
• Audited financials. The prospectus includes at least three years of audited financial statements: balance sheet, income statement and cash flow statement. Look at revenue growth, profit margins, and free cash flow.
• Risk factors. This section is often lengthy and detailed. It discloses the specific risks the company faces, from regulatory changes to dependence on a single customer. Read it carefully.
• Use of proceeds. The prospectus should explain how the company plans to spend the money raised. Is the capital for organic growth, acquisitions, debt repayment, or general corporate purposes?
• Dilution. The offering will typically create new shares, which dilutes the ownership of existing shareholders. The prospectus quantifies this effect.

The SEC's EDGAR database makes these documents publicly available. Investors can search for a company's S-1 and its amendments (S-1/A) to track changes between the initial filing and the final prospectus. The SEC's staff review often results in revisions, but the review is not a guarantee that disclosure is complete or accurate, and the SEC does not evaluate the merits of any IPO.

Primary vs. secondary market access

There are two distinct ways to buy shares in a newly public company.

Primary market: buying at the offering price

In the primary market, investors buy shares directly from the company at the IPO price, before trading begins. Access is overwhelmingly reserved for institutional investors and high-net-worth individuals managed by the underwriters. The allocation process is selective, and individual retail investors rarely receive shares at this stage.

Secondary market: buying after listing day

Once the shares begin trading on the exchange, they enter the secondary market. Here, investors buy and sell shares among themselves, and the price is determined by supply and demand. This is the route most long-term retail investors use. You place an order through your broker, just as you would for any listed company.

The table below summarises the key differences.

Volatility and long-run performance

IPO shares can be volatile, especially in the first days and weeks of trading.

First-day returns and underpricing

A common pattern is for an IPO to "pop" on its first day — the closing price is well above the offer price. Across a large historical sample of 6,249 IPOs from 1980 to 2001, the average first-day return was 18.8 percent. About 70 percent of IPOs ended the first day above the offer price, and roughly 16 percent had a negative first-day return.

First-day returns have varied significantly over time. In the 1980s, the average was 7%; it doubled to almost 15% during 1990–1998, jumped to 65% during the internet bubble years of 1999–2000, and then fell back to 12% during 2001–2003. These figures are historical and do not predict future outcomes.

Lock-up periods

After an IPO, insiders and early investors are typically subject to a lock-up period — a contractual agreement preventing them from selling their shares for a set time, usually 90 to 180 days. When the lock-up expires, a wave of newly sellable shares can enter the market, which sometimes puts downward pressure on the share price.

Long-run evidence

Academic research provides a sobering long-term perspective. Across 9,253 US operating-company IPOs from 1980 to 2024, the average three-year buy-and-hold return from the first close was 19.1%, or −20.5% after adjusting for the broader market. An earlier landmark study found that 1,526 IPOs from 1975–1984 produced an average three-year buy-and-hold return of 34.5%, compared with 61.9% for size-matched control firms — an underperformance gap of roughly 27 percentage points.

This does not mean every IPO will underperform. Some deliver exceptional returns. But the evidence suggests that, on average, newly public companies tend to trail the broader market over a three-year horizon, and the first-day "pop" does not guarantee long-term gains.

Key takeaways

• An IPO is the first sale of a private company's shares to the public, transitioning it from private to publicly traded ownership.
• Companies go public to raise capital, create liquidity for early stakeholders, and gain access to public markets for future fundraising.
• The IPO process involves underwriters, due diligence, a prospectus, roadshows, price setting, and a lock-up period.
• The prospectus — especially the business description, audited financials, risk factors, use of proceeds and dilution — is the key document for investors.
• Most retail investors access IPO shares through the secondary market after the first trading day, not at the offering price.
• First-day returns can be strong, but long-run evidence shows that many IPOs underperform the broader market over three years. Lock-up expirations and volatility are additional factors to consider.
• Before buying IPO shares, assess the company's fundamentals, the use of proceeds, and the risks disclosed in the prospectus.

Educational only — not personalised investment advice.