Two of the most hyped moments in a company's life are its IPO and any major stock split. Both generate enormous media coverage. Both are consistently misunderstood. Here's what's actually happening — and what it means for you.
An Initial Public Offering is when a private company first sells shares to the public on a stock exchange. Before an IPO, ownership is held by founders, employees, and private investors. After, anyone can buy shares on the open market.
Why go public? Three main reasons: raise capital to fund growth, give early investors and employees a way to sell their shares (called "liquidity"), and gain the brand profile that comes with being a listed company. Going public is expensive — investment banks, lawyers, accountants all take a cut, and the company takes on significant disclosure obligations forever after.
The company hires investment banks as underwriters. They write a prospectus — a detailed disclosure document — and conduct a "roadshow" pitching to large institutional investors. Based on institutional demand, banks set an IPO price — the price institutions pay the evening before listing. When trading opens the next morning, the public can buy and sell. If the IPO is popular, shares often jump. This is called the "IPO pop."
The IPO pop illusion: when people say an IPO "rose 40% on day one," they mean it rose 40% above the IPO price — which went to institutions, not you. By the time retail investors can buy, much of that gain is already priced in. Academic research shows IPOs on average underperform the market over the 3–5 years following listing. The excitement almost always outpaces the fundamentals.
A direct listing lets existing shareholders sell without issuing new shares or using underwriters. Spotify and Coinbase did this — cheaper, but no fresh capital raised. A SPAC is a "blank cheque" shell company that lists first, then searches for a private company to merge with. SPACs were wildly popular in 2020–21 and largely disastrous for retail investors who bought in at the peak.
A stock split divides existing shares into more shares at a proportionally lower price. A 10-for-1 split gives you 10 shares for every 1 you held, at one-tenth the price.
Your total position value is identical. The company's market cap is unchanged. Nothing of economic substance happened.
Splits are purely psychological — a share price of £1,500 feels out of reach. At £150, it feels accessible. Apple has split five times. Nvidia did a 10-for-1 split in 2024. The underlying business didn't change — only perception did.
A reverse split reduces share count and raises the price proportionally. Companies do this when their share price falls so low it risks being delisted from the exchange. Reverse splits are almost always a red flag about the company's underlying health.
The smart approach to IPOs: the best ones — Amazon in 1997, Google in 2004, Nvidia in 1999 — weren't obvious on day one. If a company genuinely interests you, wait 3–6 months post-IPO. The pop will have faded, the lockup period (when insiders can't sell) will have expired, and real price discovery will be underway. You'll make a much better-informed decision.
Answer questions on stock splits & ipos, earn XP, and challenge your mates to a stock duel.
Download free on iOS →