Initial Public Offering

A company belongs to its owners, and this ownership is usually divided into shares. In young companies, only a few people hold these shares: the founders, their families, a handful of investors. An Initial Public Offering is the moment when the company sells such shares to the general public for the first time. Trading then takes place through the stock exchange, a public marketplace for company shares. A company that once belonged to a small circle thus becomes a company with thousands of co-owners. This is commonly called going public, abbreviated as IPO.

What the IPO brings for the company and for investors

The most important reason is money. In an IPO, a company often issues new shares and sells them. The money raised flows into the company and does not have to be repaid, unlike a bank loan. This can be used to build factories, hire staff, or fund data centers. Technology companies in particular need such sums long before they turn a profit.

The second reason concerns the earlier owners. Anyone who put money into a start-up ten years ago holds shares that are hardly possible to sell. After the IPO, there are buyers every day, and the value is continuously determined by the market. This is called liquidity: the ability to quickly convert an investment into cash.

For ordinary investors, an IPO is the first opportunity to participate at all. Before that, shares of such companies were practically out of reach. In exchange, the company pays a price: it must regularly publish figures, submit to the rules of the securities regulator, and endure criticism from investors. Many companies therefore deliberately remain privately held.

From prospectus to first trading price

An IPO is organized by investment banks. They examine the company, estimate its value, and seek out buyers. Together with the company, they write a prospectus: a thick document detailing revenues, debts, risks, and future plans. This document must be approved by the regulatory authority, in Germany by BaFin, in the US by the SEC.

Afterwards, company executives travel to large investors to drum up money. The issue price, at which the shares are allocated, results from the purchase orders collected. On the first day of trading, the market then decides. If the price rises sharply, the IPO is considered a success; but a jump of 40 percent also means the company sold too cheaply.

A common misconception: in an IPO, the whole company does not change owners. Usually only 10 to 25 percent of the shares go public, the rest remains with the previous owners. These owners often have to hold their shares for several months so they don’t immediately depress the price with sales. An alternative is the direct listing, in which existing shares are admitted to the stock exchange without any new issuance.

IPO news in the business press

Hardly a week goes by without IPO news. Semiconductor designer Arm went public in New York in 2023, and Infineon’s chip competitors and software providers follow suit regularly. For AI companies, the IPO is especially exciting because their losses become publicly visible there for the first time.

For readers of business news, two figures matter. One is the issue volume: how much money was raised. The other is the valuation: the price per share multiplied by the total number of shares. If a company is valued at 60 billion euros, that is an expectation about the future, not a measurement of what already exists.

IPOs come in waves. In good stock market years, dozens of companies push into the market; in crises, they postpone their plans for years. Anyone wanting to buy shares in an IPO themselves should know: retail investors often receive only small allocations, and the price can fluctuate sharply in the first few weeks.