← Money Lessons with Andrew Temte, PhD, CFA
Money Lessons with Andrew Temte, PhD, CFA
Going Public: How a Private Company Becomes a Stock You Can Buy
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For everyday investors, the practical takeaway is by the time a stock is available for us to buy, the offering price is already history. We're buying on the secondary market, often at a markup to what the institutions paid the night before and the day one. Excitement isn't the long run story foreign. Hi, I'm Andy Tempte and welcome to Money Lessons. Join me every Saturday morning for bite sized lessons that are designed to improve financial literacy around the world. Today is May 23, 2026. You may have heard the phrase going public. Well, today I want to walk you through what actually happens when a company crosses that line. How a private business becomes a publicly traded stock that you and I can buy Now. An IPO or an initial public offering is the process by which a company sells shares of itself to outside investors for the first time and becomes publicly traded before the ipo. A company is private. Its shares are often held by founders, employees, and a small set of early investors like venture capital firms, angel investors, and the angel investor of them all family. Those shares don't trade on an exchange. If an early investor wants to sell, they have to find a buyer privately, and there often isn't one. After the ipo, the company is public. Its shares trade freely on an exchange, like the New York Stock Exchange or the NASDAQ for U.S. listings, and anyone with a brokerage account can buy them. An IPO occurs in what we call the primary market, the place where a company itself sells shares and raises money. Everything that happens afterward, every trade that you or I make, occurs in what's called the secondary market. Now, companies don't go public on a whim. Going public is expensive, time consuming, and brings a level of public scrutiny that many founders dread. So why do it? There are five reasons why. First is capital. A successful IPO can raise hundreds of millions or even billions of dollars of capital without taking on debt. That money funds growth in new products, new markets, and potentially acquisitions of other companies. Second, the people who got the company this far need a way to convert their ownership into cash. Founders, early employees, and venture investors have often been holding their shares for many years. Those shares are valuable on paper, but until the company is public, there's no easy way to sell them now. Third, public stock can be used as payment, a currency of sort. When buying other companies. A private company has to come up with cash to make an acquisition. A public company can offer its own shares to the seller, a much more flexible tool when you're trying to grow by buying other businesses. Fourth, public shares make employee stock Based compensation meaningful. When a company is private, granting an employee stock options or restricted shares is a promise of future value. Once the company is public, those grants have a real observable price that can be sold, which is what makes them feel like compensation rather than a lottery ticket. And fifth is visibility. Being public brings analyst coverage and customer credibility. The trade off is that public companies live under SEC disclosure rules and quarterly scrutiny. We'll spend next week's episode on what that life looks like now. When a company decides to go public, the first call is to investment bankers. The banks the company hires are called underwriters. Their job is to manage the offering, to value the company, to structure the deal, to find buyers and to stand behind the shares being sold. The lead banks form a syndicate, a group of banks that share the work and the risk. That word should sound familiar. We talked about syndicated risk sharing back on September 27th of last year in our Lloyds of London episode. The pattern is the same. A group of institutions pooling exposure to something that one institution alone couldn't absorb. Lloyds invented it for marine insurance and investment banks adapted it for securities. Now, once this syndicate is formed, the underwriters perform what's called due diligence. A deep and examination of the company's financials, operations, legal exposure and its management. They're kicking the tires. They're checking to see whether the company is what it claims to be. Then the company files an S1 with the securities and Exchange Commission. The most prominent S1 making its way around right now is the SpaceX transaction. The S1 is the formal registration document. It's also the prospectus that potential investors will read. It runs hundreds of pages and discloses everything from financial history to risk factors to executive compensation. Now, once the SEC signs off on the S1, the company goes on the road. It does what's called a roadshow. The CEO and CFO pack their bags and meet with large institutional investors. Pension funds, mutual funds, hedge funds and sovereign wealth funds, just to name a few. They tell the company story, they take questions and they try to generate interest. While that's happening, the underwriters are building their book of business and collecting indications of interest from those same institutional investors at various price points. How many shares would you buy? At 40? At 50? At $60? The night before trading opens, the underwriters and the company use that book of business to set what's known as the offering price, the price at which the IPO shares will be sold in the primary market. The instit investors who participated in the roadshow buy their shares from the company at that single price in large blocks before the public market ever opens. And here's the point that usually gets the offering price is not the price that you and I will pay when the stock starts trading now, the morning after the offering, regular public trading in the new stock begins on a public exchange, and the first price at which it changes hands is often dramatically different from the offering price the institutions paid the night before. Take Airbnb. On December 9, 2020, the offering price was set at $68. Institutional buyers in the IPO bought their shares at $68. But the next morning, December 10, when public trading opened, the first trade was at $146, more than double the offering price. The stock closed that day at 144.71. That gap between the offering and the opening is called the pop. It happens because the offering price reflects what institutions agreed to pay. The opening alternatively reflects what the broader market is willing to pay once shares are tradable. When demand outstrips the limited supply of available shares, the price jumps. Two weeks ago, we talked about the three risks of owning stock firm specific risk, market risk, and behavioral risk. Behavioral risk, as we found, is shaped by a long list of cognitive biases that affect how we make decisions under uncertainty. The bias most relevant to a hot IPO is the urge to follow the crowd to buy something because everyone else seems to be buying it at exactly the moment that excitement is at its peak. That risk is most acute in the weeks and months after a hot IPO returning to Airbnb. By mid May of 2021, five months after the offering, the stock was trading at about $132 per share below where it closed on day one. The pattern isn't unique to Airbnb. Hot IPOs frequently see post launch exuberant fade as the market digests the reality of the company without launch day excitement and as ordinary quarterly results replace the IPO narrative. Now what does this mean for you? Going public is a transformation, not just a transaction. A company changes from privately held to publicly traded, and the founders, early employees and venture investors who built it move from owning shares they couldn't easily sell to owning shares that they can. For everyday investors, the practical takeaway is by the time a stock is available for us to buy, the offering price is already history. We're buying on the secondary market, often at a markup, to what the institutions paid the night before. And the day one excitement isn't the long run story. We'll come back to the long run story in a few weeks. Next week, as we mentioned, we'll talk about what changes once a company is public, quarterly reporting earnings calls, and how the job of management transforms when the whole world is watching. Until next week, I wish you grace, dignity and compassion. My name is Andy Tempte, and this is Money Lessons. You can find the show on all the major streaming services as well as out on YouTube. Please like subscribe, rate and most importantly, share this public educational good with your friends, your family, your colleagues, and maybe a neighbor. The show is produced by Nicholas Tempte, and we'll see you next week on Money Lessons.