Learn the stock market › How listed companies work › Lesson 2 of 8
What is an IPO?
Two kinds of shares are sold
Shares in an offering can come from two places. The company can issue new ones, and then the money goes to the company. The old owners can sell some of theirs, and then the money goes to them. Many offerings are a mix.
A made-up company with 100 million shares goes public. Its owners sell 20 million, and the company issues 10 million new ones.
| Step | Amount |
|---|---|
| Shares the old owners keep | 80,000,000 |
| Shares the old owners sell, $20 each | 20,000,000 |
| New shares, $20 each | 10,000,000 |
| All shares afterwards | 110,000,000 |
| Money to the sellers | $0.4 billion |
| Money to the company | $0.2 billion |
| Market cap on the first day | $2.2 billion |
| Share held by new owners | 27% |
That difference is worth looking for in an offering: is the company raising money, or are the owners selling? The prospectus says. In this example, 27% of the shares end up with new owners.
After the IPO it works like all other trading on the market: the money goes to whoever sells, not to the company.
What it means for a buyer
The price is set before anyone has traded the stock. Nobody knows how the market will value it until trading starts, and the price can go either way on the first day. There are no old prices to compare with. What you can read is the prospectus: what the company does, what it has earned and which risks it names itself.
Two more things the SEC points out. Ordinary investors can find it hard to get shares in an IPO at the offering price at all. And insiders are often held back from selling for a time by a lockup agreement, so more shares can reach the market when it ends.
Test yourself
In an IPO, the owners sell shares for $400 million and the company issues new ones for $100 million. How much does the company get?
Sources
- US Securities and Exchange Commission, Initial Public Offering (IPO), read on 5 November 2026.