What is an IPO? | CNBC Explains

Turning an idea into a startup can lead to significant growth and success. Starting small, the venture has the potential to expand rapidly over time. Eventually, this progress may culminate in the opportunity for the company to go public.

An initial public offering (IPO) marks the first sale of a company's stock to the public, transforming it from private ownership by a few investors into widespread public ownership. This process allows potentially tens of thousands of shareholders to invest in the company. To celebrate this significant milestone, major stock exchanges like those in New York and London hold ceremonial events where participants ring bells or strike gongs.

Going public allows a company to raise significant capital, facilitating growth and investment in infrastructure while attracting top talent. Although many large companies remain private, the process of going public involves partnering with an underwriting firm that helps determine share pricing and timing for market entry. This partnership also ensures compliance with regulatory requirements like those from the U.S. Securities and Exchange Commission. The underwriter aims to sell shares at a profit, benefiting founders and early investors who may see substantial financial gains through equity compensation if their company succeeds.

In 2017, Snapchat's founder Evan Spiegel gained a significant financial boost when the company went public, receiving a stock grant worth $636 million. The following year, he sold over 2.6 million shares for approximately $50 million. That same year saw an increase in IPO activity globally with 1,764 companies going public—nearly a 50% rise from the previous year and marking the highest number since 2007; notably, U.S.-based IPOs surged by 70%. Major historical IPOs include Facebook and Alibaba’s record-breaking debut that raised $25 billion in New York.