IPOs explained: how new share offerings work, and what you really get

An IPO (initial public offering) is the first time a company sells its shares to the public and lists them on a stock exchange. Individuals usually take part through a broker, often get only a small slice of what they ask for, and pay the same offer price as everyone else in their tranche.

The first trading day can swing either way. Over years, research finds IPOs as a group have often lagged the wider market.

What an IPO is and why companies list

Before an IPO, a company is owned by founders, employees, private investors or the state. Listing can do three things:

• Raise new money for the business by issuing new shares. The cash goes to the company.
• Let existing owners sell. The cash goes to the selling owners, not the company.
• Create a market price for the shares, which helps the company pay staff in shares and raise money later.

Each share you get is a small piece of the business, and you can sell it on the exchange after listing.

Three ways to go public

A private placement is not an IPO, but many IPOs include one: a large slice goes to institutions while a smaller slice is offered to the public. In the United States, the SEC approved a New York Stock Exchange rule in September 2020 that lets companies raise new money in a direct listing.

How individuals usually get shares

Details differ by country and by offering, so confirm each step with your brokerage.

1. Have a brokerage account ready. Not every broker takes part in every IPO. Some offer IPO access only to clients who meet extra conditions.
2. Read the offering terms. The prospectus gives the price or price range, the number of shares, and the timetable.
3. Place a request. Some brokers call it an "indication of interest". It is a request, not a guarantee.
4. Pay or reserve the money. Some markets take the full amount upfront; others take a deposit. Check how much is locked and for how long.
5. Wait for allocation. After the book closes, shares are shared out under the offering's or the broker's rules. Unused money comes back.
6. Trading starts on the listing date. If you got nothing, you can still buy on the exchange at the market price, which may be well above the offer price.

Brokers may limit quick resales. US rules define a "flipped" share as one sold within 30 days of the offering (FINRA Rule 5131), and brokers can limit future IPO access for clients who flip.

Reading the prospectus

Every public offering publishes a prospectus approved under the regulator's rules. A regulator's review checks disclosure; it does not mean the shares are a good buy. Five parts matter most.

Valuation in practice. Say a made-up company offers shares at $20 and earned $0.80 per share last year. Its P/E ratio is 20 ÷ 0.80 = 25. Compare that with similar listed companies, not with the excitement around the deal.

Lock-ups. The SEC says most lock-ups bar insiders from selling for 180 days, though terms vary. When a lock-up ends, more shares may come to market, and the price may fall in anticipation.

Oversubscription: why you get so little

Oversubscription means investors ask for more shares than are on offer. Popular offerings can be covered many times over. Some markets then cut every order back in proportion (pro rata). Others let brokers use their own rules, such as a random draw.

Worked example: 20 times oversubscribed

A made-up example. A company offers 2,000,000 shares to individuals at $20. Requests total 40,000,000 shares, and orders are cut back pro rata.

Your $1,900 sat idle during the offering. Say it was locked for 14 days and could have earned 4% a year (an example rate). You gave up about 1,900 × 4% × 14 ÷ 365 = $2.92.

First-day moves, and why they aren't a plan

New shares often jump on the first day, and sometimes fall. Jay Ritter's data (University of Florida, October 2026) covers 9,253 US IPOs from 1980 to 2024. The average first-day return was 18.9%, measured from the offer price.

Your 5 shares cost $100. A 20% first-day rise makes them worth $120, a $20 gain before fees. That is 1% of the $2,000 you tied up. A 15% fall would cost you $15.

If you got nothing and buy at the first-day price instead, you miss the pop and start from a higher price. Buying or selling on first-day mood is speculation, not a long-term plan.

What the long-run research says

Ritter's tables (October 2026 update, US data, returns through December 2025) measure three-year returns from the first-day close, not the offer price. They include dividends.

Of 9,195 US IPOs from 1975 to 2021, 60% had a zero or negative return over three years from the first close. The median was −25.7%, while a few big winners lifted the average.

This is US data, and other markets may differ. Larger companies did roughly in line with similar listed firms, and group averages say nothing about one offering.

Your plan

1. Get your base right first. Keep your emergency fund in cash and pay off expensive debt before investing in shares.
2. Ask your broker how IPO access works. Eligibility, minimum order, deposit, allocation method and any flipping limits.
3. Read the prospectus. Note the use of proceeds, who is selling, the valuation against similar companies, the risks and the lock-ups.
4. Request only what you could pay for in full. Assume you might get every share.
5. Decide your holding plan before trading starts. Write down why you'd keep or sell, based on the business, not the first-day price.
6. Note the lock-up end date in your calendar.
7. Keep it small. An IPO is still one company, so it should be a small part of your long-term money.

What to watch out for

• Hype and crowds. Big oversubscription numbers show demand, not value. Following the crowd is herd behaviour.
• Borrowing to subscribe. Using margin or loans to inflate an order magnifies losses.
• Chasing the first-day price. Buying after a big pop means paying the crowd's price, not the offer price.
• "Guaranteed allocation" or "pre-IPO" offers. Anyone selling guaranteed IPO shares, or asking you to pay outside a regulated broker, is a red flag. Check the firm on your regulator's register.

This guide is for education only. It is not advice to subscribe to, buy or sell any offering or share.