IPO

An IPO is the deal that takes a business from private to public: before it, a stake in the company changed hands under individually negotiated contracts; after it, any market participant can buy and sell that stake. The seller may be the company itself (the proceeds from the sale of new shares go into the business) or its existing shareholders (the proceeds go to them) — often both in a single deal. Legally the outcome is the same: the issuer gets a market price, a ticker and a duty to disclose information.

How the offer price is set

The company and its bookrunners announce a price range and a period for collecting orders. Investors place their orders through a broker — for an amount of money or for a number of lots (lot). These orders make up the book: the bookrunner sees how much demand falls at each price level and picks a single cut-off price at which all the accepted orders are filled. If demand exceeds the number of shares on offer, orders are filled only in part — this is IPO allocation, and it is what determines how much of your order turns into shares and how much comes back to you as cash.

Once trading starts, it is an ordinary stock

On the first day of trading the mechanics of the primary offering end and the secondary market begins: the price is formed by opposing orders in the order book, settlement runs on a T+1 basis, and from then on the stock lives on equal terms with any other. The exchange itself once went through an initial public offering too, and today its share is no different from the rest of the list — the same quotes, spread and multiples:

The market's valuation of it relative to earnings is shown by 6,15.

What gets mistaken for an IPO

The first mix-up is treating any arrival of a stock on an exchange as an IPO. A listing that raises no money, a direct listing, a transfer of trading from another venue — none of these is an IPO, because there is no public sale of new shares. The second and any later offerings by a company that is already traded are called an SPO; the order-collection mechanics there are similar, but the word is different.

The second is the expectation that "placing an order" means "buying the chosen volume at the offer price". When demand is high, only part of the order is filled, and when the offering is weak, all of it is filled — which is no cause for celebration.

The third is carrying habits formed on large stocks over to a new one. A freshly listed share has a narrow circle of holders, limited liquidity and elevated volatility: the spread is wider, and a single order moves the price more than it does in index stocks. On top of this come the lock-up periods that bar the previous shareholders from selling — when they expire, supply that was not there before appears on the market.