What is an IPO? How initial public offerings work

An initial public offering, or IPO, is the first sale of a private company’s shares of stock to public investors. After the offering, the company’s stock can trade on a public exchange, where anyone can buy or sell it on the open market.

“Going public” does not mean the company becomes government-owned under a nation state. It means members of the public can now buy and sell its shares. After a company goes public, ownership shifts from a small group of founders, employees, and private investors to a much larger pool of institutions, trading funds, and individual investors.

Once a company lists, its shares trade the same way as every other listed stock on any brokerage platform. On Kraken, for example, US users can trade more than 11,000 US-listed stocks and ETFs.

Check out the video below for all the details you need to know about tokenized equities and how they are redefining the financial system.

Companies go public to unlock capital and liquidity that private ownership cannot easily provide. Selling shares to the public is one of the largest financing events most companies ever undertake, and the reasons for doing it tend to cluster around a handful of goals.

The most common motivations include:

1. Raising money to fund expansion, research, hiring, acquisitions, or debt repayment.
2. Creating a public market value for the company, so its shares have a transparent, continuously updated price.
3. Giving early investors and employees a route to liquidity, letting them eventually convert paper wealth into cash.
4. Using publicly traded shares as currency for acquisitions or as employee compensation.
5. Increasing visibility and credibility with customers, partners, and future hires.

Going public also comes with real costs. A public company must publish detailed financial disclosures every quarter, answer to outside shareholders, and manage the pressure of a stock price that reacts to every earnings report and headline. Legal, accounting, and underwriting fees for an IPO can run into the tens of millions of dollars.

The scrutiny is permanent, not one-time.

That trade-off explains why some large, profitable companies stay private for years. The decision to go public is a judgment that the benefits of access to capital and market liquidity outweigh the burden of public-market accountability.

An IPO works through a structured, months-long process that moves a company from private ownership to a public listing in five broad stages.

Each stage involves different participants, from investment banks to regulators to the investors who ultimately buy the shares.

1. Preparation. The company hires investment banks, auditors, and lawyers, and prepares its financial disclosures.

2. SEC registration. In the US, the company typically files an S-1 registration statement, which contains its prospectus.

3. Investor marketing. Underwriters gauge interest from prospective investors (often called the “roadshow”) and help determine demand.

4. Pricing and allocation. The company and its underwriters set the offering price and allocate a limited number of shares.

5. Public trading. The stock lists on an exchange, and its market price begins moving based on supply and demand.

The prospectus is the document that matters most for anyone who wants to look under the hood. It covers the company’s financial condition, its business model, the risks it faces, how it plans to use the money raised, and the specific terms of the offering. In the US, you can find it on the SEC’s EDGAR database, filed as part of the S-1.

One point the SEC addresses directly is that its review of an IPO focuses on whether the company has disclosed the required information, but it is not an endorsement of the investment or a judgment that the price is fair. As the SEC’s Investor Bulletin on investing in an IPO puts it, regulatory review checks disclosure compliance, not investment merit.

Underwriters, usually a syndicate of investment banks, sit at the center of the process. They advise on timing and price, buy the shares from the company, and resell them to investors. They are ultimately the ones deciding who receives an allocation at the offering price, which is why access has traditionally been limited.

A company raises money in an IPO when it issues and sells new shares. This is the part that is most often misunderstood, because not every share sold in an IPO sends money to the company.

Consider a practical example. If a company sells 10 million newly issued shares at $20 each, it raises $200 million before underwriting fees. In exchange, the people who buy those shares now collectively own a portion of the company that did not exist as public stock the day before. The cash goes onto the company’s balance sheet, where it can be used to fund whatever the prospectus described.

Now the important distinction. Shares sold in an IPO fall into two categories:

• Primary shares: New shares created and sold by the company. The company receives the proceeds. This is the fundraising part of the IPO.

• Secondary shares: Existing shares sold by founders, employees, or venture-capital investors. The sellers receive the proceeds, not the company. This is the liquidity part of the IPO.

A single offering can include both. Imagine a company that sells 15 million shares in total: 10 million primary shares that raise $200 million for the business, and 5 million secondary shares at the same $20 price that put $100 million toward early backers cashing out. The headline “raised $300 million” would be misleading, because only $200 million actually funds the company.

You can see exactly which is which in the prospectus. The “Use of Proceeds” section tells you what the company plans to do with the money it raises, and the offering tables show whether existing owners are selling shares alongside the company. Reading those two sections tells you whether an IPO is primarily about funding growth or primarily about letting existing shareholders sell part of their holdings.

An IPO is often described as a company raising money. In many offerings, a large share of the proceeds actually goes to early investors and employees selling existing stock, not to the company itself. The prospectus is the only place that distinction is spelled out clearly.

The IPO price and the price you see on the first day of trading are two different numbers, and confusing them is one of the most common sources of confusion. There are actually three separate prices worth understanding independently.

• IPO offering price: The price set for investors who receive an allocation before public trading begins. In the earlier example, that is $20.

• Opening price: The price at which the stock first starts trading on the exchange when the market opens.

• Market price: The continuously changing price everyone sees afterward, driven by supply and demand in the open market.

A company might price its IPO at $20, but the stock could open at $28 if demand is strong, or below $20 if it is weak. The offering price is negotiated between the company and its underwriters, while the opening price is set by the market. Because of this, they frequently do not match.

The gap between the offering price and the opening price has a name in academic research: IPO underpricing. According to data compiled by Professor Jay Ritter at the University of Florida, US IPOs returned an average of 15.3% on their first day of trading in 2024, and averaged 19.0% on the first day across the full 1980 to 2025 period. During the internet bubble of 1999 to 2000, that first-day average spiked to roughly 65%.

A first-day jump can look like free money, but it is worth being clear about who captures it. The investors who receive shares at the offering price benefit from any pop. Investors who buy once the stock is trading pay the higher market price and capture none of it. Individual investors have traditionally been in the second group, which is exactly the gap that IPO access on Kraken is designed to close by giving eligible clients access to the IPO offering price (more on this below).

For high-priced newly public stocks, fractional shares such as those offered on Kraken can make a position accessible without committing to a full share.

Traditionally, access has been limited. Most IPO shares are allocated to institutional investors and high-net-worth clients of the underwriting banks, because those relationships help the underwriters place a large block of stock quickly and reliably.

Some brokerages do offer eligible retail clients access to IPO allocations. Popular deals are frequently oversubscribed, meaning investor demand exceeds the number of shares available. When that happens, an individual investor might receive no shares at all, or only a partial fill of the amount they requested. As Investor.gov notes in its explainer on why individuals often have difficulty getting IPO shares, allocation decisions rest largely with the underwriters and the issuing company.

There is a subtle but important framing point here. Buying a stock on its first day of trading is not the same as accessing the IPO offering price. When you buy on listing day, you are buying from another market participant at the market price. The offering price is the price the company and its underwriters set before trading begins.

Kraken opens up access to that offering price for eligible clients, and how it works depends on where you live. During an IPO’s submission window, you can submit an indication of interest, with your access priced off the IPO offering price (plus a fee), instead of waiting until the stock lists. Allocations are decided by the IPO’s underwriters based on demand, so they are not guaranteed, and any funds that are not allocated are returned to your account.

In the US, this is offered through Kraken’s traditional equities product. If you are allocated, the shares are credited to your account when the company lists, with no lock-up.

In the EEA and many other regions, eligible clients access IPO xStocks instead. These offer price exposure to the IPO price rather than share ownership, and if you are allocated, IPO xStock tokens are credited to your account when the company lists. IPO xStocks are not equity and confer no voting or shareholder rights. IPO access is available in most regions except for the UK, Canada, or Australia at this time.

Once a company goes public, its obligations, its ownership structure, and the behavior of its stock all change. The private company that could operate quietly now lives on a public schedule.

Several shifts happen at once:

• The company begins regular public reporting, including quarterly and annual financial disclosures filed with regulators.
• Its share price now moves continuously with trading activity, earnings results, news, and broader market conditions.
• Employees and early investors often face a lock-up period before they are allowed to sell their shares.
• The company can raise more money later through follow-on stock offerings, convertible debt, or other public-market financing.

The lock-up period deserves attention because it directly affects supply. A lock-up is an agreement that restricts existing shareholders from selling their shares for a set window after the IPO, commonly around 180 days, though terms vary by deal. It exists to prevent a flood of existing holders (such as current employees or venture capitalists) from selling and potentially overwhelming the stock right after it lists.

When a lock-up expires, a large number of previously restricted shares can become tradable at once. That increase in available supply can add downward pressure and volatility to the share price, depending on how many holders choose to sell. Investor.gov’s overview of IPO lock-up agreements describes how these restrictions work and why expiration dates are worth watching.

A lock-up expiration is a scheduled, disclosed event. It is different from an unexpected trading halt or a company simply choosing not to sell. Knowing the lock-up date in advance is part of reading an IPO carefully.

Investing in a newly public company carries risks that established public companies do not, largely because there is less public history to evaluate them. Understanding each risk before you buy is the difference between an informed decision and a bet on hype.

The main risks include:

1. Limited public financial history. A company that has been public for a decade has 40 quarters of scrutinized financials. A freshly listed company might have two, which makes valuation harder.

2. High early volatility. Newly public stocks can swing sharply as the market figures out what the company is worth without a long trading record to anchor expectations.

3. First-day pops that reflect scarcity, not value. A jump on day one can come from a limited share supply and short-term excitement rather than durable business fundamentals.

4. Lock-up expirations. When restrictions lift, the supply of tradable shares can rise suddenly, which can weigh on the price.

5. Dual-class share structures. Some companies issue shares that give founders outsized voting control, leaving public shareholders with limited say in governance.

6. The reason for raising capital. A company may be going public because it needs money, not because it has reached durable profitability. The prospectus risk factors are where these concerns are disclosed.

Here is the line worth remembering: an IPO makes a company investable to the public, but it does not make it inherently a good investment.

One approach some investors use to manage the volatility of a newly public stock is to build a position gradually rather than all at once. Our guide to dollar-cost averaging explains how spreading purchases over time can smooth out the effect of short-term price swings.

An IPO is one of three main routes a private company can take to reach public markets, and the differences come down to whether new capital is raised and how shares reach investors. A compact comparison makes the distinctions clear.

• IPO. Raise capital and list shares. New shares are commonly created and sold to investors through underwriters.
• Direct listing. List existing shares publicly. Often focuses on liquidity for existing holders rather than raising new money.
• SPAC merger. Merge with an already public shell company. A private company becomes public by merging with a special purpose acquisition company.

A direct listing skips the creation of new shares and the underwriting syndicate. Existing shareholders simply make their shares available to trade on the exchange, which provides liquidity but usually does not raise fresh capital for the company. A SPAC, or special purpose acquisition company, is a publicly traded shell that raises money first and then finds a private company to merge with, taking that company public through the merger.

Each path has trade-offs in cost, speed, capital raised, and regulatory treatment. The IPO remains the most common route when a company’s primary goal is to raise money while listing. For a broader look at how listed equities compare to digital assets as investments, our guide on stocks versus crypto sets the two side by side.

Situation. An investor reads that a well-known software company is going public and wants to participate. The IPO is priced at $22 per share. Excited by the coverage, they open their brokerage app on listing morning ready to buy “at the IPO price.”

Approach. When the stock opens for trading, it does not open at $22. Strong institutional demand pushes the opening print to $31. The investor, not understanding the difference between the offering price and the opening price, buys 100 shares at $31, assuming they got in at the ground floor.

Outcome. Over the following weeks, the initial excitement cools and the stock drifts back toward $24 as the market settles on a valuation. The investor is down roughly 23% from their entry, even though the stock is still trading above its $22 offering price. The early shareholders and institutions who received shares at $22 are up. The newcomer who bought at $31 is not.

Key lesson. The offering price and the price an individual pays on listing day are usually different numbers. Buying at the open means paying the market price set by demand. Accessing the offering price means getting in before public trading begins. Knowing which one you are doing, and being willing to wait rather than chasing a first-day pop, is one of the most useful habits a new IPO investor can build.

Eligible clients can get access to a company’s IPO offering price, not only the market price once it starts trading publicly.

During an IPO’s submission window, you can submit an indication of interest, with your access priced off the same IPO offering price that large investors receive, plus a fee. How that access works depends on where you live, and the two routes differ in an important way.

The process is built around the account you already have:

1. Unlock stock trading. Create your Kraken account and complete the appropriateness questionnaire to enable equities.

2. Submit your interest. Add funds and choose how much you want to commit before the submission window closes.

3. Receive your allocation. The IPO’s underwriters determine allocations based on demand. Allocation is not guaranteed and is not first-come, first-served, and any funds not allocated are returned to your account.

4. Get your allocation when it lists. If you are allocated, your allocation is credited to your account when the company lists, with no lock-up. In the US you receive the underlying shares. In the EEA and other regions you receive IPO xStock tokens that track the price of the underlying share.

You now understand what an IPO is, how it raises money, why the offering price and the first-day trading price so often differ, and why accessing the IPO offering price is not the same as buying once the stock lists. That knowledge is most useful when you can act on it directly.

With IPO access on Kraken, you can get access to the IPO offering price (plus a fee) rather than waiting for the stock to open. You submit an indication of interest during the submission window, the underwriters decide allocations (so an allocation is not guaranteed, and unallocated funds are returned), and if you are allocated, your allocation is credited to your account when the company lists, with no lock-up.

Sign up for Kraken today so you can request access to the next IPO launching on the platform.