Have you ever wondered how an ambitious startup transforms into a household name on the stock exchange and how you can get a piece of the action? With companies like SpaceX, OpenAI, Anthropic, Databricks, and Stripe generating headlines, the buzz around initial public offerings (IPOs) is significant. Successfully navigating a new issue requires looking past the hype to understand what an IPO actually is, including the underlying mechanics of how a private company enters the public market.

What is an IPO?

Think of an IPO as a company’s transition from private ownership to the public stage. Up until this point, a growing business usually relies on founders, angel investors, or venture capitalists for funding. But eventually, it hits a milestone where it needs a much larger pool of capital to fuel its next chapter. By issuing new shares directly to the public for the first time (in what is known as the primary market), the company can secure the funds it needs for expansion, innovation, acquisitions, or debt repayment. 

However, this broader access to capital comes with a major trade-off. To access public capital, a company must open its books and publish its financial reality and operational history to the scrutiny of regulators and investors alike. This provides transparency so the public can accurately evaluate the company's risks and growth potential before investing.

The regulatory process

Before shares can trade, a company hires an underwriter (typically an investment bank) to manage regulatory compliance, gauge institutional demand, and establish an initial price range.

Regulators require companies to publicly disclose their business models, financials, and risks. In Canada, this is captured in a document called a preliminary prospectus accessed via the SEDAR+ database, while US listings require a Form S-1 on the EDGAR database. Reviewing these specific documents is the most effective way to cut through market speculation and assess the facts.

Following regulatory review, the underwriter coordinates a “roadshow” where executives pitch the business to large institutional investors to drum up demand and finalize the offering price. Once set, the stock is officially listed on an exchange, completing the transition to a publicly traded company.

Market realities for the retail investor

While the idea of getting in on the ground floor is appealing for its early exposure to newly public companies and the potential for an initial price surge, the mechanics of allocation heavily favour scale. Institutional investors typically receive priority access to initial shares due to their massive purchasing power. As a result, the ability of the average retail investor to participate at the initial offering price—especially for highly anticipated mega-cap IPOs—is a rarity.

Instead, particularly for these high-demand listings, interested retail investors and advisors will likely need to wait until standard trading begins to purchase shares on the secondary market (the public stock exchanges where investors trade existing shares with one another). This requires discipline as opening days are often defined by volatile prices as initial demand clashes with available supply. Rather than trading on day-one momentum, waiting for the initial volatility to settle can help limit the chance of purchasing high and having prices retreat. This also reduces the likelihood of being swept into making an emotional decision based on the fear of missing out (FOMO). To navigate these events successfully, long-term investors should examine the company's required filings to assess its true financial health and consult their financial advisor for personalized guidance.

Making sure an IPO is right for your portfolio

An IPO is the beginning of a company's public track record, not the final destination. While securing a primary market allocation is challenging, the secondary market provides ample opportunity to capitalize on long-term growth. Closer to home, the Canadian IPO market is beginning to see a significant revival after several quiet years. Leveraging access to the institutional network and market capabilities of our affiliate, ATB Cormark Capital Markets, an ATB advisor can help you evaluate both domestic and US IPOs to determine if they align with your portfolio's strategy and potentially secure primary market access when allocations permit.