How it works
The company files an S-1 registration with the SEC, hires investment-bank underwriters who set a price range, and conducts a roadshow with institutional investors. The day before listing, the underwriters allocate shares at a final offer price. On listing day, those shares open on an exchange (NYSE or Nasdaq) at a market-clearing price that can be far above the offer. Some IPOs use a direct listing or a SPAC merger instead, both bypassing the traditional underwriter pricing.
Example
Snowflake IPO’d in September 2020 at an offer price of $120. The stock opened at $245 (more than 100 percent first-day pop) and closed near $254. Underwriters captured $120 for shares the market valued at $245, a substantial transfer from the company to allocated institutional investors. The company raised about $3.4 billion but left an estimated $3+ billion on the table. Direct listings (Spotify, Coinbase) avoid this pricing inefficiency but lose the price stabilisation underwriters provide.
Why it matters
IPOs are high-volatility liquidity events with extreme information asymmetry: insiders know much more than the public. Retail investors usually receive small or no IPO allocations and end up buying in the secondary market at the inflated opening price. Lock-up periods (typically 90 to 180 days) prevent insider selling early but cause sharp drops when they expire. The IPO window opens and closes with market conditions: in cold markets, deals are pulled.
