IPOs explained: how a listing works, lock-ups, first-day pops and trading new shares with CFDs

An initial public offering (IPO) is the first time a private company sells shares to the public and has them listed on a stock exchange. Investment banks gather orders from large investors, set an offer price, and allocate shares at that price; trading on the exchange then starts, usually the next morning, at whatever price buyers and sellers agree. For most retail traders the IPO they can actually trade is that first open and what follows, not the offer price itself.

This guide walks through the process step by step, explains why first-day prices often jump, what lock-ups and stabilisation do to early trading, how direct listings and SPACs differ, and the specific risks of trading new listings through share CFDs. For the basics of primary and secondary markets, see how stock markets work.

Why companies go public

A company lists for some mix of these reasons:

• Raising capital. Selling new shares (a primary offering) brings cash into the company for expansion, debt repayment or acquisitions.
• Giving early holders an exit. Founders, employees and venture capital or private equity investors can sell some of their shares (a secondary sale) at the IPO or later.
• A currency for deals and pay. Listed shares can be used to buy other companies and to pay staff with share awards that are easy to value and sell.
• Profile and access to markets. A listing raises visibility and makes it easier to raise money again later.

Listing also brings costs and obligations: underwriting fees, legal and accounting costs, regular financial reporting, disclosure rules, and scrutiny from shareholders and the press.

How a traditional IPO works

Details vary by country and exchange, but a typical bookbuilt IPO follows these stages.

1. Choosing the banks

The company appoints one or more investment banks as underwriters, often called bookrunners or global coordinators. They advise on timing, structure and valuation, and later market the shares to investors. In return they receive a fee, typically a percentage of the money raised.

2. Due diligence and the prospectus

Lawyers, accountants and the banks examine the business and prepare a prospectus: the main legal document describing the company, its finances, risks, management, the offer and how the money will be used. In the US this goes into a registration statement filed with the SEC (Form S-1 for most domestic companies). In the UK and EU a prospectus must be approved by the relevant regulator, such as the FCA in the UK or the national authority in the EU country concerned. Companies are restricted in how they promote themselves while this is going on.

3. The roadshow and price range

The banks publish an indicative price range and take management on a roadshow of presentations to institutional investors such as pension funds, insurers and asset managers. Investors indicate how many shares they want and at what prices. This is bookbuilding: the banks build a book of demand.

4. Pricing and allocation

When the book closes, the company and the banks set the final offer price, usually the evening before trading starts. Strong demand can push the price to the top of the range or above it, or lead to more shares being offered; weak demand can mean pricing below the range, cutting the size, or postponing altogether. Shares are then allocated, largely at the banks’ discretion. Popular deals are heavily oversubscribed, so many investors get far fewer shares than they asked for.

Some markets and brokers run retail offers that allow individuals to apply at the offer price, but retail allocations are usually a small slice of the deal, and in hot deals they are often scaled back.

5. The first trade

On the first day the exchange runs an opening auction for the new share. In the US this can be hours after the normal market open, because the exchange and the banks gather orders until a price can be found that matches enough buying and selling. The order book then works as it does for any other share.

6. Stabilisation and the greenshoe

Most IPOs include an over-allotment option, often called the greenshoe. The banks sell more shares than the base deal, commonly up to 15% extra, creating a short position for themselves. If the price falls below the offer price after listing, they can buy shares in the market to cover that short, which supports the price. If the price rises, they instead use the option to buy the extra shares from the company at the offer price. Stabilisation is permitted only for a limited period and is disclosed. It can soften early falls, but it does not stop a share from dropping well below its offer price.

7. Quiet period and research

For a period after the IPO, the banks that ran the deal are restricted from publishing research on the company. When that period ends, several banks often start coverage at once, which can move the share.

The first-day pop

Many IPOs close their first day above the offer price, sometimes far above. Academic research has documented this underpricing over decades of US listings, though the size varies enormously by year and deal, and some IPOs fall on day one.

Common explanations:

• Deliberate underpricing. The banks and the company leave some money on the table so that investors who took the risk of the book are rewarded and come back for the next deal.
• Limited supply. Only a fraction of the company’s shares is sold, and much of that goes to long-term holders, so the free float available to trade is small.
• Unmet demand. Investors who wanted shares and did not get them buy in the open market.
• Attention. Well-known names attract media coverage and retail interest on day one.

The important point for a trader is who captures the pop. The gain from offer price to opening price goes to the investors who received allocations. Someone buying on the exchange is buying after that jump has already happened.

Worked example: buying at the open

Illustrative numbers, not a real deal. A company prices its IPO at 20.00 a share. Demand is strong and the opening auction prices the first trade at 30.00, a 50% jump.

A retail trader with a euro account buys 50 share CFDs at 30.00 when trading opens (ignoring currency conversion for simplicity). Notional exposure: 50 × 30 = 1,500. At the maximum 5:1 retail leverage for shares under ESMA rules, margin would be 300; many providers ask for much more margin on a new listing, for example 50%, which would be 750.

Over the next three sessions the excitement fades and the share settles at 24.00:

• The trader’s loss: (30 − 24) × 50 = 300, before spread, commission and financing. On a 5:1 margin of 300, that is the entire margin.
• Investors who received shares at the offer price of 20.00 are still 20% up.

Same share, same days, very different results depending on the entry. Our profit and loss calculator is useful for testing scenarios like this before placing a trade.

Lock-ups and why they matter later

When a company lists, its existing shareholders usually agree not to sell their remaining shares for a set period. This lock-up reassures new investors that insiders will not dump stock immediately. In the US lock-ups of around 180 days are common, though terms vary and some allow staged or early release if conditions are met. Lock-up terms are set out in the prospectus.

Worked example: the overhang

Illustrative numbers. A company has 400 million shares after its IPO. It sold 60 million to the public at 20.00, raising 1.2 billion, which gives a market value of 8 billion at the offer price. The free float is 60 million shares, or 15% of the total.

The other 340 million shares belong to founders, employees and early investors. If 300 million of them come out of lock-up on the same date, the number of shares that could legally be sold rises from 60 million to 360 million, six times the original float.

Not all holders will sell, and lock-up dates are public, so markets often start pricing the risk beforehand. But share prices are frequently weak in the run-up to large lock-up expiries, and the expiry can bring heavy volume. Traders holding positions into those dates should know they are coming.

Other routes to market

Direct listings

In a classic direct listing the company lists its existing shares without a bookbuilt offer and without underwriters taking the usual role, so existing holders can sell but no new money is raised. (US exchanges have since also allowed direct listings in which the company sells new shares in the opening auction, but these remain rare.) There is no offer price; the opening auction sets the first price. Spotify’s listing on the New York Stock Exchange in 2018 is one of the best-known examples. Direct listings can avoid underwriting fees and the lock-up structure, but they give less price support in early trading.

SPACs

A special purpose acquisition company is a listed shell that raises money in its own IPO and then searches for a private company to merge with, taking it public through the merger. SPAC listings surged in 2020 and 2021 and then fell away sharply. Many companies that went public this way traded well below the SPAC’s listing price afterwards. The structure is complicated, with sponsor shares and warrants that can dilute later shareholders.

Placings and introductions

Particularly in London, smaller companies may list by placing shares directly with selected investors, or by introduction, where existing shares are admitted without raising money. These routes create less fanfare and often a thinner market.

Trading new listings with CFDs

Share CFDs on a new listing are a different product from IPO shares, and the practical details matter.

• Timing of availability. Some providers add a new share as soon as it starts trading; others wait days or weeks. You generally cannot trade a CFD on the IPO before the exchange opens it.
• Higher margin. Providers often set margin well above the regulatory minimum on new listings because there is no history to model the risk.
• No short selling at first. Shorting needs borrowable shares, and early on there may be none available. Our guide to short selling stocks explains borrow and recall risk.
• Wide spreads and gaps. Early trading is thin and volatile. A share can move 10% or more in minutes, and spreads widen accordingly. Stops can be filled far from their level; see slippage explained.
• Results days arrive quickly. A new company’s first quarterly results as a listed company can be a big event because analysts have few data points. See earnings season explained.
• Index inclusion. Index providers have their own rules for when new listings become eligible. Inclusion can bring large buying flows, as covered in index rebalancing explained.

The basic differences between owning a share and holding a CFD, such as no voting rights and daily financing on the full position, are covered in stock CFDs vs real shares. Most retail CFD accounts lose money, and leverage on a share with no trading history magnifies that risk.

Sizing a position with no history

Without past price data you cannot measure typical volatility, so a stop based on an average range is not available. Some traders use the first days’ high and low as reference points, others simply size much smaller than usual. Whatever you use, base the size on the money you would lose if the stop is hit, as the position sizing guide explains, and assume that the real loss could be larger if the share gaps. The position size calculator does the arithmetic.

How to read an IPO prospectus quickly

You do not need to read hundreds of pages. A few sections answer most questions:

• The offering summary: number of shares, primary versus secondary, price range, greenshoe.
• Use of proceeds: is the money going into the business or to selling shareholders?
• Risk factors: long, but they show what the company itself sees as its biggest risks.
• Financial statements and key metrics: revenue growth, margins, cash burn, debt. Our guide to reading an earnings report covers what to look for.
• Share structure: some companies list with dual-class shares that give founders more voting power than public shareholders.
• Lock-up terms: who is locked up, for how long, and whether early release is possible.
• Dilution: how much the new shares, options and share awards will dilute existing holders.

Valuation ratios such as price-to-sales or price-to-earnings, explained in our P/E ratio and valuation basics guide, give a rough comparison with listed peers.

Common mistakes

• Assuming you can get the offer price. Most retail buyers get the market price after the open, which already includes the pop.
• Treating the first day as the trend. First-day moves often reverse partially in the following days and weeks.
• Forgetting the lock-up date. It is in the prospectus and can be a major source of supply months later.
• Using normal position sizes. No history, a small float and wide spreads justify smaller positions, not larger ones.
• Expecting to short easily. Borrow may be unavailable or expensive, and short positions can be squeezed in a small float.
• Relying on hype. Heavy media coverage is not information about the company’s value. Be wary of anyone offering "pre-IPO" shares through cold calls or social media; see forex scam red flags.

Frequently asked questions

Can retail investors buy shares at the IPO price?

Sometimes, through retail offers or brokers that receive an allocation, but allocations for individuals are usually small and are often scaled back in popular deals. Most retail traders can only buy once the shares start trading on the exchange, at the market price.

Why do IPOs often rise on the first day?

Offer prices are often set below the level demand would support, to reward the institutions that take part, and only a small part of the company is available to trade. Investors who did not get an allocation then buy on the exchange. Not every IPO rises; some fall on the first day.

What is an IPO lock-up?

An agreement by existing shareholders, such as founders, staff and early investors, not to sell their shares for a set period after listing, commonly around 180 days in the US. When it ends, many more shares can be sold, which can weigh on the price.

What is a greenshoe option?

An over-allotment option that lets the banks sell more shares than the base offer, commonly up to 15% more. If the price falls after listing, the banks can buy shares back in the market to support it; if it rises, they buy the extra shares from the company at the offer price.

When can I trade a new listing with a CFD?

Only once the share has started trading on its exchange, and only if your provider has added it. Some add new listings on the first day, others later. Expect higher margin requirements, wider spreads and possibly no short selling at first.

What is the difference between an IPO and a direct listing?

In an IPO, banks run a bookbuilding process, set an offer price and allocate new or existing shares to investors before trading starts. In a direct listing, existing shares are simply listed and the first price is set in the opening auction, with no offer price and usually no new money raised.