What Is an IPO? – New York Institute of Finance

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Getting into the right initial public offering (IPO) at the right time can feel exciting for any investor. Many people look at newly listed companies on a stock exchange and wonder whether they should try investing in an IPO to catch early growth. But before you jump into any company that is going public for the first time, it’s important to understand what an IPO actually is, how the IPO process works, and what you should look out for in both the short term and long term.

This guide keeps Gabriel’s simple, friendly style — just clearer, longer, and more keyword-aligned — so readers get a straightforward explanation of how an IPO works and how a private company becomes a public company that sells its shares to the public.

What Is an IPO?

An initial public offering (IPO) is the moment a private company decides to raise capital by offering shares to everyday investors. Before this point, the company may have raised money from founders, friends and family, angel investors, or venture capital firms. But these early investments are private agreements, not open to the public.

During an IPO, the company sells its shares to the public for the very first time. This transforms the business into a public company, which brings more responsibility, transparency, and regulations. Once the shares are listed on a stock exchange, anyone can buy or sell them on the stock market.

One of the main reasons companies raise capital through an IPO is to fund expansion — whether it’s launching new products, entering new markets, hiring more people, or simply building a stronger financial foundation.

Going public also gives early investors the chance to eventually sell their shares once any lock-up periods expire. For some founders and early team members, this is the moment when years of work finally convert into real financial value.

Why Do Companies Go Public?

While every company has its own reasons, most IPOs happen because the business wants to grow faster and reach more people. Here are the most common reasons a company decides to go public:

1. To Raise Capital

This is the biggest motivation. A successful IPO lets the company bring in significant funds that can be used to:

• scale operations
• pay off debt
• build new products
• invest in research
• expand geographically

A private company simply cannot raise this much money through small private investors. An IPO opens the door to large institutional investors, mutual funds, and everyday retail investors.

2. To Increase Visibility

Becoming a public company increases credibility. Customers, partners, and future investors tend to trust companies that operate with transparency and follow regulatory rules.

3. To Create Liquidity

Before an IPO, early investors can’t easily sell their shares. A public listing creates a liquid market where shares can be bought and sold freely.

4. To Strengthen the Company’s Future

Public companies often find it easier to:

• attract top talent
• negotiate partnerships
• borrow money at better terms
• plan for the long term

All these advantages make IPOs an important milestone for growing organizations.

How Does an IPO Work?

Understanding how the IPO process works helps investors evaluate new opportunities more confidently. While the full process can be complex, here’s the simplified journey — exactly in the clear, approachable style Gabriel originally used.

1. Preparing With an Investment Bank

To start the IPO journey, a company hires an investment bank (or several banks) to guide the entire process. These banks act as “underwriters,” meaning they help:

• determine how much money the company aims to raise
• prepare financial documents
• decide how many shares to issue
• set an appropriate offering price

This partnership is crucial because the investment bank helps shape the company’s valuation and introduces the IPO to large institutional investors before it reaches the public.

2. Filing the Registration Statement

Before a company can officially go public, it must file a detailed registration statement with the Securities and Exchange Commission (SEC). This includes important information such as:

• financial statements
• risks
• business model
• management discussion
• future plans
• use of IPO funds

Part of this registration includes the preliminary prospectus, sometimes called the “red herring.” It’s a document potential investors read to understand what the company does and what it plans to achieve.

The SEC reviews the information to make sure it’s accurate and not misleading. Once approved, the company can move forward with the IPO.

3. Setting the IPO Price

After reviewing investor interest and market conditions, the company and the investment bank decide the final IPO price. This is a carefully calculated number because:

• if the price is too high → the stock might drop as soon as it hits the market
• if the price is too low → the company might raise less money than it could have

Finding the right balance helps the company raise capital successfully while giving investors a fair entry point.

4. Allocating Shares to Early Investors

Before shares reach the general public, the company usually offers the first allocation to:

• employees
• early investors
• institutional funds
• business partners
• friends and family

These early groups often get shares at the official offering price before trading begins.

5. Going Public on the Stock Exchange

Once the IPO date arrives, the company is officially listed on a major stock exchange, such as the NYSE or NASDAQ. From that moment onward, anyone can buy or sell the shares on the stock market.

Stock prices may rise or fall throughout the day depending on demand, news, and overall market conditions.

What to Consider Before Investing in an IPO

While the idea of getting in early sounds exciting, investing in an IPO comes with both opportunities and risks.

1. IPOs Can Be Volatile

Just because a company goes public doesn’t guarantee success. Some IPOs rise quickly, but others fall below their offering price within days.

2. Public Companies Face Pressure

Once a company becomes a public company, it must release quarterly results and meet shareholder expectations. If the management team is inexperienced or unprepared, the business may struggle under this pressure.

3. Lock-Up Periods Affect Early Pricing

Many early investors are required to hold their shares for a set period (often around 90 days). When the lock-up period expires, some investors may sell a large portion of their shares, which can temporarily push the stock price down.

4. Consider the Long Term

Instead of focusing only on day-one hype, look at the company’s fundamentals, leadership, product strength, and long-term strategy. Good companies tend to grow steadily over time, even if the stock fluctuates at the beginning.

Are You Ready for More?

This overview gives you a clear understanding of how an IPO works, why companies choose to go public, and what to look for before making a decision. If you’re ready to explore topics like valuation, corporate finance, and capital markets in greater depth, consider NYIF’s Investment Banking Certification.

Related Courses: Investment Banking Certification

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