What is an IPO, and how does a company float?

An initial public offering is the first sale of a company's shares to the public, turning a private company into a listed one. It is as much a liquidity event for existing owners as a fundraising, and understanding which it is tells you a great deal about any particular offering.

Why companies do it: raising capital for growth; giving founders, employees and early investors a way to sell; acquiring a publicly traded currency for acquisitions; prestige and visibility; and providing an exit for venture or private equity backers.

Why they increasingly avoid it: the cost of listing and ongoing compliance; quarterly scrutiny and short-term pressure; disclosure obligations that help competitors; and — most significantly — abundant private capital, which has let large companies stay private far longer than previous generations.

How the process runs: advisers and underwriting banks are appointed; extensive due diligence and preparation of a prospectus follow; management conducts a roadshow with institutional investors; a price range is set; the book is built from institutional demand; a final price is struck; shares are allocated; trading begins.

The structural facts that matter to a small investor:

Allocation favours institutions. Retail investors frequently cannot buy at the offer price at all, and instead buy on the first day at whatever the market sets.

First-day "pops" are not free money for you. A price jumping 30% means institutions who received allocations gained; someone buying in the open market that morning paid the raised price.

Lock-up expiry, typically 90 to 180 days after listing, is when insiders may sell — a well-documented source of price weakness.

The float may be small, so a modest free float can make the price volatile and unrepresentative.

The seller knows more than you. Owners choose when to sell, which is a genuine information asymmetry — and long-run studies generally find IPOs underperform the market over several years, on average.

The alternatives: direct listings, which avoid underwriting and new share issuance, and special purpose acquisition companies, whose record has been poor.

General information, not investment advice.