What is IPO?

An IPO (Initial Public Offering) is when a private company sells shares to the public for the first time, becoming publicly traded on a stock exchange. It's how companies raise capital from public investors — and how early investors and founders cash out. For retail investors, it's often the beginning of a complicated relationship.

The company hires investment banks (underwriters) to determine the offering price and sell shares to institutional investors first. Then shares list on an exchange and retail investors can buy them in the open market. The underwriters take a fee, the company gets cash, early investors celebrate, and retail often buys the top.

Statistically, IPOs underperform the market over a 3-5 year horizon in most studies. The first-day pop is mostly captured by institutional investors who got shares at the offering price. By the time retail can buy, much of the excitement is already priced in — and the lock-up expiry 6 months later often brings extra selling pressure.

In an IPO, new shares are created and sold by underwriters — the company raises fresh capital. In a direct listing (used by Spotify, Coinbase), existing shares are sold directly without new share creation and without underwriters. No lockup, no underwriter discount, more price transparency. Fewer people get rich off the fees.

The largest IPOs include Saudi Aramco ($25.6B in 2019), Alibaba ($25B in 2014), and SoftBank ($23.5B in 2018). In the US tech space, notable ones include Meta ($16B), Google ($1.9B in 2004), and the ill-fated WeWork attempt that spectacularly failed to even launch. Larry considers the WeWork saga required reading.