IPO Definition And Meaning In Stock Trading

IPO Definition And Meaning In Stock Trading

When a company issues stock, this is part of a complicated process. Major stock exchanges, such as the New York Stock Exchange and Nasdaq, have high standards and requirements in place to make sure that the best offerings make the cut. 

The process of listing shares on a stock exchange is called an initial public offering, or an IPO. 

IPOs allow companies to list a part of their outstanding shares on an exchange, which comes with a one-off capital inflow, as well as continuous liquidity and publicity. 

However, while going public does have its advantages, it also comes with added responsibilities for the management of the company. 

Whether a company is part of the S&P 500, or a micro-cap stock, financial regulations oblige companies to release financial statements to the public and increase the overall transparency of their operations. 

IPOs are important events in the lifecycle of a company and there are a few different methods of floating shares on an exchange. 

What Is An IPO And How Does It Work?

The Initial Public Offering (IPO) process is a complex and regulated procedure through which a private company becomes publicly traded by offering its shares to the general investing public for the first time.

The IPO is a multi-layered process that is done through a lot of regulatory scrutiny. Thorough due-diligence is essential to make sure that investors have access to the relevant information regarding the company going public. 

Preparation & Planning

The preparation stage is one of the most important steps in the IPO process, which largely determines the success and regulatory compliance of the offering. 

Some key preparation steps companies take prior to an IPO include:

  • Selection of Underwriters: The company selects investment banks or underwriters to manage the IPO process. These underwriters help determine the offering price and assist with regulatory compliance
  • Due Diligence: The company undergoes extensive financial and legal due diligence to ensure that it meets the requirements for going public and that its financial disclosures are accurate
  • Financial Statements: The company prepares audited financial statements in compliance with regulatory standards, such as Generally Accepted Accounting Principles (GAAP). For non-U.s listings, companies must comply with the IFRS accounting standards

Regulatory Filings

As a second step, companies need to formally file with the Securities and Exchange Commission:

  • SEC Registration: The company files a registration statement with the U.S. Securities and Exchange Commission (SEC) in the United States, or the relevant regulatory authority in other countries. This statement includes comprehensive information about the company's operations, financials, management, and risks
  • Waiting Period: The SEC reviews the registration statement. During this period, the company cannot actively promote the IPO, but it can engage in "quiet periods" to communicate with potential investors on a limited basis

After the SEC clearance, the company embarks on a roadshow, where it presents its business to potential investors, including institutional investors, analysts, and fund managers.


  • Price Determination: Based on investor feedback and market conditions, the underwriters and the company set the offering price for the shares. This price reflects the valuation of the company
  • Allotment: Investors submit orders for shares, and the underwriters allocate shares to institutional and retail investors

Trading On The Stock Exchange

The culmination of the IPO is listing on a stock exchange, but the regulatory steps do not stop here:

  • Listing: The company's shares are listed on a stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ. The shares are assigned a ticker symbol
  • Trading Begins: On the day of the IPO, the shares become available for trading on the exchange. The opening price may differ from the offering price due to market demand

Post-IPO Compliance

  • Ongoing Reporting: Public companies must adhere to regulatory requirements, including regular financial reporting (quarterly and annually), disclosures of significant events, and updates on material changes in business operations
  • Corporate Governance: Public companies often establish boards of directors and audit committees to ensure transparency and compliance with governance standards

IPO-s Using SPAC-s

A direct IPO is not the only method for companies to go public and list their shares on an exchange. 

A special purpose acquisition company, or SPAC, is a legal entity that serves as a blank check company that is listed on an exchange and seeks to merge with a private start-up to give it a cash injection and take it public. 

In a SPAC IPO, investors purchase shares in the SPAC, which then holds the funds in trust while seeking a suitable target.

Once a merger is identified and approved, the private company effectively becomes publicly traded without going through the traditional IPO process.

SPACs offer a faster and potentially less costly route to becoming a public company.

However, it must be noted that most SPACs entering the market tend to fall much lower in price compared to their entry price of roughly $10 per share. 

Key Takeaways From IPO Definition And Meaning In Stock Trading

  • An IPO is the process by which a private company goes public, offering its shares to the general investing public for the first time
  • A crucial step involves selecting underwriters, conducting due diligence, and preparing financial statements in compliance with regulatory standards
  • Companies must file a registration statement with the SEC or relevant regulatory authorities, disclosing comprehensive information about their operations, finances, and management
  • After the IPO has been finalized, companies are required to release periodic financial and governance reports to keep investors informed 
  • SPACs are another route of going public among companies, which is done via a black check company which merges with a private company and takes it public 

FAQs On IPO Definition And Meaning In Stock Trading

How does an IPO work?

An Initial Public Offering (IPO) is when a private company goes public. It involves selecting underwriters, conducting due diligence, and preparing financial statements. The company files with regulators, conducts a roadshow to attract investors, sets the offering price, and lists shares on a stock exchange.

Do companies receive money from an IPO?

Yes, companies typically receive money from an IPO. In an IPO, the company issues new shares to the public and receives the proceeds from the sale of those shares, which can be used for various purposes, including business expansion and debt reduction.

What happens after an IPO?

After an IPO, a company becomes publicly traded. It must adhere to ongoing regulatory requirements, including regular financial reporting and corporate governance practices. It can access capital markets for funding and faces increased transparency and accountability to shareholders and the public.