Offer price is not trading price
Many individuals buy at the market price.
All tracks and lessons
IPOs: how companies go public
An initial public offering is a company’s first sale of shares to the public. Early trading can be volatile.
In this lesson you will
- Explain what an IPO is
- Know why early IPO trading is volatile
- Find the prospectus and risk factors
An initial public offering (IPO) is when a private company first sells shares to the public and lists them on an exchange. It raises money for the company and lets early owners sell some of their stake.
How it works
The company works with investment banks to set a price range, gauge demand from large investors and set a final offer price. Shares then begin trading on the secondary market, where the price can move far from the offer price.
Why early trading is unpredictable
- There is little public trading history.
- Hype can push early prices up, and they can fall back.
- Insiders are often restricted from selling for a lock-up period, commonly several months; when it ends, more shares may be sold.
Read the prospectus
Before an IPO, the company files a prospectus with the SEC describing its business, finances and risks. It is long, but the risk-factors section is worth reading.
Education only — GetGuac does not recommend individual stocks.
By the GetGuac team · Editorial policy
Three ideas to keep
Little history, high uncertainty
Early prices can swing.
Lock-ups end
Insider selling can follow.
Do it in 4 steps
Learn the stages
Pricing, listing, trading.
Find the prospectus
On the SEC’s EDGAR database.
Read the risk factors
At minimum.
Note the lock-up date
If following a new listing.
Offer price versus first-day price
Made-up IPO: 10,000,000 shares offered at $20.
| Item | Value |
|---|---|
| Money raised at offer price | $200,000,000 |
| First trade | $30 (+50% vs offer) |
| Buying 10 shares at first trade | $300 |
| Same 10 shares if price returns to $20 | $200 |
Buying at the first trade rather than the offer price can mean starting with a loss if hype fades.
Where this usually goes wrong
- Assuming you will get the offer price
- Buying on hype alone
- Skipping the risk factors
Search the SEC’s EDGAR database for any recent prospectus and read its first risk factor.
Tools and guides for this lesson
Quick quiz
1. An IPO is…
2. Many individuals buy IPO shares at…
3. A lock-up period restricts…
0 of 3 answered
Puzzle
An IPO is priced at $18 and first trades at $27. What is the first-trade percentage gain over the offer price?
Show the answer
50%
($27 − $18) ÷ $18 = 0.5.