How U.S. IPOs Work — From S-1 Filing to First Trade

1. What is an IPO?

An initial public offering (IPO) is a company’s first sale of shares to the public. After the IPO, the shares trade on an exchange such as the NYSE or Nasdaq, and anyone with a brokerage account can buy or sell them. You can see upcoming deals, price ranges and underwriters on this site’s IPO calendar.

2. The S-1: the company’s prospectus

Before going public, a company files a registration statement (Form S-1) with the Securities and Exchange Commission. Foreign companies listing in the U.S. often use Form F-1 instead. The S-1 includes:

• What the company does, its business risks and its competitors
• Audited financial statements (revenue, losses or profits, cash flow)
• How it plans to use the money it raises
• Who owns the company and how much management is paid

Companies can file confidentially at first, so the public S-1 sometimes appears only a few weeks before the deal. Amended versions (S-1/A) later add the expected price range and the number of shares. All filings are free to read on the SEC’s EDGAR system.

3. Roadshow and book-building

Once the price range is set, the company and its underwriters (the investment banks running the deal) go on a roadshow, pitching the stock to large investors. Investors tell the banks how many shares they want and at what price. This process is called book-building.

If demand is strong, the range may be raised; if it is weak, the range may be cut or the deal postponed.

4. Pricing and allocation

The final IPO price is usually set the evening before trading starts. The underwriters then decide who gets shares.

• Most shares go to institutional investors such as mutual funds and pension funds.
• Some brokers offer individual customers access to IPO shares, but allocations are limited and often depend on eligibility rules. Requesting shares does not guarantee you get any.
• In popular deals, many investors receive far fewer shares than they asked for, or none at all.

5. The first trading day

The stock does not open at the IPO price. Buy and sell orders build up, and the exchange sets an opening price that can be well above or below the IPO price. The first trade often happens late in the morning or around midday.

• There is no daily price limit on U.S. stocks, so the first day can bring very large moves in either direction.
• The underwriters may support the price for a short time by buying shares if it falls below the IPO price (this is called stabilization), but there is no guarantee.
• Buying at the open after a big jump means paying far more than institutions paid the night before.

6. After the IPO

7. A first-timer’s checklist

1. Read the S-1’s business description and risk factors, not just the headlines.
2. Compare the IPO valuation with similar listed companies.
3. Remember that first-day gains go mostly to investors who received shares at the IPO price.
4. Note the lock-up expiration date before buying.

IPOs can be exciting, but new stocks with short trading histories are often more volatile than established companies. Decide how much risk you are willing to take before you buy.