What Is an IPO?

How an IPO Works

When a private company wants to raise capital from public investors, it conducts an IPO — initial public offering. The company works with investment banks (called underwriters) to determine the offering price, the number of shares to issue, and the timing. On the IPO date, shares begin trading on a stock exchange and anyone can buy or sell them.

Before the IPO, only private investors, founders, and employees own equity. After the IPO, the company's ownership is distributed among public shareholders.

Why Companies Go Public

The primary reasons: to raise capital for growth, expansion, or debt repayment; to provide liquidity for early investors and employees who want to sell their shares; and to increase visibility and credibility — being publicly listed adds legitimacy and can attract customers, partners, and talent.

The trade-off: public companies must disclose financial information, submit to regulatory oversight, and manage quarterly earnings expectations from analysts and investors.

IPO Pricing and the First Day

The offering price is set before trading begins, but the market determines the actual price once trading starts. If demand exceeds supply, the share price rises above the offering price — this is called 'popping.' Some IPOs pop 50% or more on the first day, while others fall below their offering price.

First-day volatility is extreme. Spreads are wide, price discovery is chaotic, and institutional investors who received shares at the offering price may sell immediately for a quick profit. This makes IPO day trading particularly risky for retail participants.

Trading IPOs as CFDs

Most brokers offer share CFDs on newly listed companies shortly after the IPO. This allows you to trade the post-IPO price action — both long and short — without having participated in the offering itself. Waiting a few days or weeks for the initial volatility to settle before taking a position is generally the safer approach.