IPOs
The moment a private company starts trading publicly. Also the moment its existing owners are finally able to sell.
An initial public offering is the first sale of a company's shares to the public. After it, the shares trade on an exchange and anyone can buy them.
Who is selling, and why
Two different things can happen, and they are worth separating.
- New shares issued. The company creates and sells new shares, and the money raised goes to the company to fund the business.
- Existing shares sold. Founders, employees and early investors sell some of their holdings. That money goes to them, not the company.
A flotation that is mostly new shares is a company raising capital. One that is mostly existing holders selling is an exit. Both are legitimate; they are not the same event, and the proportions are disclosed.
How the price is set
Not by the market, at first. Investment banks gauge institutional demand and set an offer price. The public market then opens and discovers what it actually thinks, which is why first-day moves can be large in either direction.
If shares priced at $20 open at $40, the company sold them for half of what buyers were willing to pay. Money that could have funded the business went instead to whoever received an allocation at the offer price.
Lock-ups
Insiders usually agree not to sell for a set period, commonly around six months. When that expires a large quantity of shares can become sellable at once, which is a supply event the market generally knows is coming.
What you are buying
- A business with a short public track record and no history of reporting to public shareholders.
- A valuation set in a period of concentrated attention.
- A share count that may expand as employee awards vest.