What is an IPO? Learn the basics

As you explore the world of investing, you may come across the term IPO, which stands for Initial Public Offering. This is when a company transitions from being privately held to issuing its stock to the public, making its shares available for anyone to purchase as an investment. 

Why do companies do an IPO?

Companies may come from small beginnings, perhaps even created in a founder’s garage. While companies are growing in the early stages, they’re typically owned by one or a few founders, which allows them to be nimble and move quickly to stay on a growth trajectory.

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However, there are limitations to being a private company, such as reduced visibility and limited access to significant funding. Depending on where the company is in its growth cycle, this may determine whether it is beneficial to initiate the process of going public. 

Financial reasons

Going public allows the company to raise even more money by selling shares to the public, rather than private investors, which can help the business grow, expand, and hire additional employees. This may also serve as an opportunity for early investors and employees who have received shares to sell them and potentially receive a windfall for their early belief and investment in the company, assuming the IPO is successful. 

Public recognition and credibility

The company may also have an opportunity to build widespread public recognition and credibility. Now that the company is listed on the stock exchange, its financial information is accessible to investors worldwide. 

If the company demonstrates a successful business model and manages its finances effectively, that could translate to its stock rising in value. If that happens, the company might consider offering more shares at a higher price later.  

The IPO process: How a company goes public

The process of a company going public can be very rigorous, so potential investors know that a company has been thoroughly vetted before they decide to invest. This process may include:

• Choosing underwriters and investment banks to review all of the company’s financials and decide the viability of the company going public. 

• Preparing the financial documents and registration filings to officially begin the public registration process. 

• Marketing the IPO in “roadshows,” where the company gauges the public’s interest in buying shares while positioning it as a viable investment. 

• Setting the offer price and number of shares that will be issued now that the company has done its due diligence. 

• Launching the IPO, as shares start trading on a stock exchange. 

• Setting lock-up periods when insiders cannot sell their shares immediately to protect the price and not lead to a sell-off in the markets. 

Risks and trade-offs of going public

While there are many benefits to going public, there are also potential pitfalls, pros, and cons that company owners must weigh before deciding whether the IPO process is best for their business, including:

• Costs: Additional expenses, including legal, regulatory, and accounting fees, are incurred when launching an IPO. 

• Transparency: Public companies are required to disclose their financial information and regularly report financial results to shareholders. 

• Pressure: Now that many more shareholders and public markets as a whole are involved, or at least interested, in the company’s success, this may apply additional pressure to the company, its employees, and its leaders due to the extra scrutiny. 

• Control: With many more people involved, founders often have less control over their company and its direction. 

• Volatility: Stock prices can be highly volatile, especially for a new public company, which can lead to additional pressure and a loss of control. This could affect the company’s reputation and future viability.  

How investors can think about IPOs

• Evaluate pros and cons. When deciding whether to invest in an IPO as part of your investment portfolio, weigh the opportunity against the risk. 

• Research fully. IPOs, as new investments breaking into the market, can be exciting, but that also comes with uncertainty, so do your research and due diligence before investing. 

• Consider starting small. Most investments take time to show results, especially IPOs, so it might make sense to start with a smaller dollar amount when tackling new investments. 

Greenlight helps families learn how to invest

Greenlight’s money management and investing app* gives kids the opportunity to learn how to invest with parental supervision. Kids can research investments, propose trades, and parents can review them, giving families a chance to discuss together before making an investment. While every IPO may not be directly available, families have access to investing in a variety of stocks and ETFs.

New investing opportunities on the horizon

The frequency of IPOs varies, depending on economic and stock market factors, but they are constant, bringing new investment opportunities to the market. It’s wise to approach IPOs with as much care as any investment: Rather than getting caught up in the hype, decide if it’s a good fit for your risk tolerance, goals, and overall investment portfolio before deciding to invest. 

Investing is for kids, too. With Greenlight, kids can learn to invest with parental approval on every trade. Build their financial confidence! Try Greenlight, one month, risk-free.†

*© 2025 Greenlight Investment Advisors, LLC, an SEC Registered Investment Advisor provides investment advisory services to its clients. Investing involves risk and may include the loss of principal. Investments are not FDIC-insured, are not a deposit, and may lose value.