An IPO looks, from outside, like a single event: a company appears on an exchange one morning and a price starts moving. Almost everything that determines that price happened in the weeks before, in rooms you were not in, and understanding the sequence explains most of the behaviour people find strange about the first day.
A company deciding to list appoints investment banks to underwrite the offering. They handle the filing, the marketing, and — the part that matters most — the process of finding out what large investors will pay.
A prospectus is filed with the market regulator and made public. It is long, and it is the single most useful document that will ever exist about the company at this stage: the financials, the ownership structure, what the company intends to do with the money, and a risk section that is more candid than any marketing that follows it.
Then management tours institutional investors — the roadshow — presenting the business and gauging demand. An indicative price range is published. That range is a starting position, not a forecast, and it moves before the final price is set.
During the roadshow the underwriters build a book: institutions state how many shares they want and at what price. This is where the offer price actually comes from — not a valuation model, but collected demand.
Two things follow that surprise people. The final price can land above or below the published range, because the range was a hypothesis being tested. And the price is deliberately not set at the absolute maximum the book would bear: underwriters generally want the offering fully taken up and trading stably afterwards, which argues for leaving some room rather than clearing the market exactly.
Shares are allocated at the offer price the night before. When the market opens, those shares meet public demand for the first time — and that demand was not part of the bookbuild.
So the stock does not open at the offer price. It opens wherever buy and sell orders first cross, which can be materially different. The gap between the offer price and the opening price is the difference between what institutions negotiated and what the wider market will pay.
Early trading is usually volatile, for a structural reason rather than a psychological one: only a fraction of the company's shares are available to trade. The rest are still held by founders, employees and early investors, and are restricted. A small tradeable float means modest order flow moves the price a lot.
Underwriters also commonly have an option to sell additional shares — an over-allotment — which gives them a mechanism to support the price in the first days if it falls below the offer. That support is temporary by design, and knowing it exists explains some otherwise odd early stability.
Mostly institutions. Allocation is decided by the underwriters, and it is not a queue — it reflects relationships and who they want holding the stock.
Retail access varies by market and by broker; some offerings reserve a tranche, many do not. The practical consequence is that most individual investors are not buying at the offer price at all. They are buying in the open market, after the first cross, at whatever the market decided — which is a different transaction from the one the headline describes.
Insiders — founders, employees, early backers — normally agree not to sell for a set period after listing. The length is stated in the prospectus.
When that period ends, a large quantity of shares becomes sellable at once, and the tradeable float can expand substantially. Whether holders actually sell is another matter, but the expiry date is known in advance by anyone who read the prospectus, and it is a scheduled change in the supply of shares rather than news.
The other scheduled event is the first earnings report as a listed company — the first time the business is measured publicly against whatever expectations the listing created.
Mostly it means the first days are a poor source of information. A newly listed company has a small float, no trading history, a supply of shares that will change on a known schedule, and a price discovered by a market that has had days rather than years to form a view. Movement in that environment reflects those mechanics at least as much as it reflects the business.
If you are curious about a company that has just listed, the prospectus is the thing to read, and it is free. The risk section in particular will tell you more than any amount of watching the first week's price.
This article describes how the process works. It is not a view on whether to participate in any offering, and nothing here should be read as a recommendation.