UNDERSTANDING STOCKS

IPO & DPO stocks: Types of new issue stocks

Learn about the different types of new issue stocks and how companies use them to raise capital.

Already a client? Log in to get started

What is an Initial Public Offering (IPO)?

An Initial Public Offering, or IPO, is when a private company decides to "go public" and become a publicly traded company by offering shares on a stock exchange such as the New York Stock Exchange (NYSE) or Nasdaq.

Private companies go public for a variety of reasons, the main one being to raise capital to reinvest and grow the business.

Upbeat music plays throughout.  

Narrator: An IPO, or Initial Public Offering, is the initial sale of a company's stock to the public.

Prior to the IPO, the company's stock is privately held and cannot be sold to the public.

Startup companies may go public to raise money to develop and grow their business. Other companies may go public to expand existing products or services.

There are some other advantages to going public.

Companies can raise capital without increasing debt and allow existing shareholders to profit from company growth by liquidating their shares.

But on the flip side, public companies have increased reporting requirements and additional marketing, accounting, and legal costs.

So how exactly does a company go public?

First, a company gets the help of an investment bank to underwrite the public offering of shares.  This means they set the price for how much each share sells for. In turn, the underwriter gets a commission on the sale of these shares.

Often, the lead underwriter will gather other investment banks into a syndicate, allowing more institutions to get involved.

The company, along with the underwriting syndicate, will develop a prospectus—a report detailing the specifics of the offering—and will register with the SEC and then get purchase commitments from institutional investors, brokers, and other banks.

These groups then make the shares available, generally to high-value customers, typically in exchange for holding the stock for a period of time.

This placement of shares is the Initial Public Offering.

Once the IPO is complete, shares start trading on a stock exchange.

It's here that the stock price is determined by market forces, not the underwriters or company.

Often, there is a great deal of excitement driving buying and selling.

Investors interested in participating in the initial placement should check with their broker for share availability.

But for the average retail investor, buying shares at the offering price before the stock starts trading is difficult. Most will have to wait until it trades on the stock exchange.

It's important to realize that the risk of an IPO varies based on the company going public. Some companies have a long history of earnings growth prior to going public, while others might be going public to generate money to pay their bills. There are also risks common to most IPOs, including the lack of previous trading history, limited company information, and initial price volatility. And the risk of loss is substantial.

But with the risk of loss comes the potential for profit as well.

And this potential is one reason many traders pay so much attention to IPOs.

Onscreen text: [Schwab logo] Own your tomorrow®
Video Transcript

Understanding IPOs

Upbeat music plays throughout.  

Narrator: An IPO, or Initial Public Offering, is the initial sale of a company's stock to the public.

Prior to the IPO, the company's stock is privately held and cannot be sold to the public.

Startup companies may go public to raise money to develop and grow their business. Other companies may go public to expand existing products or services.

There are some other advantages to going public.

Companies can raise capital without increasing debt and allow existing shareholders to profit from company growth by liquidating their shares.

But on the flip side, public companies have increased reporting requirements and additional marketing, accounting, and legal costs.

So how exactly does a company go public?

First, a company gets the help of an investment bank to underwrite the public offering of shares.  This means they set the price for how much each share sells for. In turn, the underwriter gets a commission on the sale of these shares.

Often, the lead underwriter will gather other investment banks into a syndicate, allowing more institutions to get involved.

The company, along with the underwriting syndicate, will develop a prospectus—a report detailing the specifics of the offering—and will register with the SEC and then get purchase commitments from institutional investors, brokers, and other banks.

These groups then make the shares available, generally to high-value customers, typically in exchange for holding the stock for a period of time.

This placement of shares is the Initial Public Offering.

Once the IPO is complete, shares start trading on a stock exchange.

It's here that the stock price is determined by market forces, not the underwriters or company.

Often, there is a great deal of excitement driving buying and selling.

Investors interested in participating in the initial placement should check with their broker for share availability.

But for the average retail investor, buying shares at the offering price before the stock starts trading is difficult. Most will have to wait until it trades on the stock exchange.

It's important to realize that the risk of an IPO varies based on the company going public. Some companies have a long history of earnings growth prior to going public, while others might be going public to generate money to pay their bills. There are also risks common to most IPOs, including the lack of previous trading history, limited company information, and initial price volatility. And the risk of loss is substantial.

But with the risk of loss comes the potential for profit as well.

And this potential is one reason many traders pay so much attention to IPOs.

Onscreen text: [Schwab logo] Own your tomorrow®

What you should know about IPOs

IPOs refer to private companies working with an investment bank to underwrite the issuance of stock. Any company intending to IPO must file a prospectus Tooltip with securities regulators and supply investors with financial information before listing. However, these companies do not have any trading history in the public markets or lengthy historical financial results, so investors should consider keeping a cautious outlook.

Learn more about IPO basics

Getting started with IPOs

Calender of offerings

Find information about upcoming IPOs, including prospectuses.

Clients can log in and read now

Steps to participate in an offering

Learn the basic steps you must follow to participate in a public offering through Schwab.

Clients can log in and read now

What is a Direct Public Offering (DPO)?

A DPO, also known as a direct listing, is a way for companies to become publicly traded without a bank-backed IPO.

Instead of raising new outside capital like an IPO, a company's employees and investors convert their private ownership into publicly traded stock. Existing investors can cash out unrestricted stock at any time without the "lockup" period of traditional IPOs.

What you should know about DPOs

DPOs are an alternative to IPOs in which a company does not work with an investment bank to underwrite the issuing of stock. Although forgoing the services of an underwriter provides a company with a quicker, less expensive way to raise capital, the opening stock price will be completely subject to market demand and potentially volatile market swings.

When a company directly lists on the open market, clients have no eligibility requirements or forms to fill out. The only requirement is to have sufficient capital in your account to purchase stock.

Once the stock is listed, shares can be purchased by the general public in the same way any other stock is purchased.

Comparing IPOs and DPOs side by side

Explore the differences between IPOs and DPOs

Comparing IPOs and DPOs

Initial Public Offerings Direct Public Offerings
Shares are offered before the market opens Shares start trading on an exchange with no previously issued shares
Not all investors may have access to the listed shares at first Everyone has access to the shares at the same time
The issuing company typically relies on an underwriter The issuing company does not utilize an underwriter
The underwriter advises on the terms of the offering The issuing company proceeds without underwriter assistance
Generally attractive for larger companies Generally attractive for smaller companies
Process typically takes more time Process is usually faster

Participating in new issue stocks has unique drawbacks that can adversely affect your investment.

IPOs have unique drawbacks that can adversely affect your investment, including:

  • No prior market for the new issue exposes investors to price uncertainty (prior to issue) and potential price volatility (after issue).
  • New issue companies are often smaller, newer, and lack operating history, making them riskier investments compared to more established publicly traded companies.
  • If the company decides to do a follow-on offering of additional new shares after the IPO, the value of your investment could be reduced.

DPOs also have unique drawbacks that can adversely affect your investment, including:

  • Since DPOs are not traded on listed exchanges (though some trade in over-the-counter markets) and usually have limited investor participation, they are not as liquid as exchange-traded investments.
  • DPOs may not be required to provide the same level of information as IPOs and publicly traded companies, which can make it difficult to assess the health of the issuing company.
  • Potential for immediate insider selling, as there may not be any lockup provisions.
  • DPOs are typically issued by smaller, less-established companies with shorter operating histories and untested management teams.

Prior to entering a conditional offer to purchase or an indication of interest, always read the initial prospectus for any new issue stock.

Additional resources

Not yet a Schwab client?

Already a client?

Log in to get started : opens in a new window

Have questions about IPOs and DPOs? We're here to help.

Call

866-855-5635

Chat

Professional answers 24/7

Visit

Find a Schwab branch near you