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How NASDAQ IPOs Work


IPO Sales
When Krispy Kreme had its IPO on the NASDAQ stock index, shares opened 11 points higher than their offering price.
When Krispy Kreme had its IPO on the NASDAQ stock index, shares opened 11 points higher than their offering price.
Photo courtesy Chris Hondros/Getty Images

The next step is to raise the money from the IPO. This happens through a process known as the road show, in which the company makes presentations to large investors and investment banks to sell large blocks of stock at the IPO price.

This may seem odd. It would seem that, in the IPO, the shares would be offered to the general public. But in most cases they're not. Large investors and investment banks buy big blocks of stock after private conversations with the company. They pay for the stock with big chunks of cash.

So what happens on the actual morning of the IPO? The money from the big investors flows into the company's bank account, and the big investors start selling their shares at the public exchange. All the trading that occurs on the stock market after the IPO is between investors; the company gets none of that money directly. The day of the IPO, when the money from big investors hits the corporate bank account, is the only cash the company gets from the IPO.

The fact that investors start trading the stock on the morning of the IPO controls the offering price in the IPO. The company can choose any price for its initial shares. If the company chooses a price that is too low, it leaves money on the table. The price of the stock will jump up as soon as people start trading it. But if it chooses a price that is too high, the opposite happens. The stock price falls, and that can leave a stain on the company's reputation. Therefore, companies and their bankers spend lots of time considering the IPO price.

When the money hits the bank account, it is a little less than the total raised in the IPO. For example, the company might get 92 percent of the money. The other 8 percent goes to pay the people who helped usher the IPO through the process: law firms, accountants and the primary investment bank that handled the IPO.

Still, the company receives a huge amount of cash -- cash it can now use to grow the business.

On the morning of the IPO, the NASDAQ exchange often has an IPO ceremony. Executives, employees and family members from the company come to the NASDAQ studio at Times Square to celebrate the IPO at the opening bell. The CEO signs in and the event is broadcast on the NASDAQ MarketSite tower in Times Square as well as on TV networks around the world. On that day, the company morphs into a publicly traded entity and starts a new phase in its corporate history.