New issue stocks: IPO stocks and DPO stocks

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

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 is an IPO?

An Initial Public Offering, or IPO, is when a private company becomes a public company by offering shares on a securities 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.

What you should know about IPOs

Participating in a new IPO through Schwab allows you to potentially purchase stock at the IPO price. The IPO price is determined by the investment banks hired by the company going public. If you meet eligibility requirements and Schwab is participating in the IPO you are interested in, you can place a conditional offer to purchase. Be sure to read the preliminary prospectus Tooltip prior to submitting a conditional offer to purchase IPO shares. Placing a conditional offer to buy does not guarantee that you will receive shares of the IPO.

Calendar of Offerings

Find information about upcoming IPOs, including prospectuses.

Steps to Participate in an Offering

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

IPO Basics: What to Know Before Investing

Before investing in IPOs, learn about these important considerations. 


What is a DPO?

A Direct Public Offering (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 ownership into stock that is then listed on a stock exchange. Existing investors can cash out 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, there are 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.

  • 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 cuts out the underwriter to save costs
  • The underwriter has a say in the terms of the offering
  • The issuing company sets the terms according to its best interests
  • Generally attractive for larger companies 
  • Generally attractive for smaller companies
  • Process typically takes more time
  • Process is usually faster

Risks to consider

Anyone interested in investing in IPO stocks needs to be aware of the unique risks associated with these securities that can adversely affect your investment, including:

  • No prior market for the new issue exposes investors to potential price volatility as well as price uncertainty for IPOs (prior to issue). 
  • New issue companies are often smaller, newer, and lack operating history, making them riskier investments compared to more established publicly traded companies.
  • After the new issue, if the company decides to offer additional securities to raise capital, it could dilute the interest of the existing shareholders.
  • For DPOs, there is the potential for immediate insider selling, as there may not be any lockup provisions. 
  • Dependence on key personnel, which can have a significant effect on performance. 
  • For DPOs, the offering may have a minimum size, which, if not met, might result in offers not being filled or the offering being canceled.

Prior to entering a conditional offer to purchase, always read the initial prospectus for any new issue stock. 

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