What is an IPO? Understanding Primary and Secondary Markets for Beginners

Last Updated: January 2026 | 7 min read

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Picture this: You're scrolling through financial news and see headlines about Stripe planning its IPO, Reddit going public in 2024, or Shein preparing for one of the biggest stock market debuts ever. Everyone's talking about shares, market debuts, and billions in valuation. But what does it all actually mean?

If you've ever wondered how private companies become publicly traded stocks, or where those shares you buy on your investing app actually come from, you're in the right place. Understanding IPOs and the markets where stocks are born and traded is essential knowledge for anyone looking to build wealth through investing.

What Exactly is an IPO?

IPO stands for Initial Public Offering. It's the process where a private company offers its shares to the general public for the very first time, transforming from a privately held business into a publicly traded company listed on a stock exchange.

Think of an IPO as a company's grand opening to public investors. Before the IPO, only founders, employees, venture capitalists, and select private investors own pieces of the company. After the IPO, anyone with a brokerage account can become a shareholder.

Real-World Example: Airbnb's IPO Journey

In December 2020, Airbnb went public at $68 per share, raising over $3.5 billion. The home-sharing platform, founded in 2008, had been privately funded by venture capital firms for years. When they decided to go public, regular investors could finally buy Airbnb stock. On its first day of trading, shares jumped to $144, nearly doubling in value and demonstrating the massive public interest in the company.

Why Do Companies Go Public?

Companies pursue IPOs for several strategic reasons, and understanding these motivations helps investors evaluate whether a newly public company is a good investment opportunity.

💰 Raising Capital

Going public allows companies to raise significant amounts of money without taking on debt. This capital can fund expansion, research and development, acquisitions, or paying down existing debt. When Rivian went public in November 2021, it raised $11.9 billion, providing massive resources to scale its electric vehicle production.

🚪 Providing Exit Opportunities

Early investors and employees holding stock options want liquidity. An IPO creates a market where they can sell their shares and realize their investment gains. When Coinbase went public in April 2021, early employees who joined when the company was worth millions suddenly had shares worth billions.

📈 Enhancing Credibility and Visibility

Being publicly traded brings prestige, media attention, and increased brand awareness. Public companies often find it easier to attract top talent, secure partnerships, and negotiate better terms with suppliers and customers.

💵 Currency for Acquisitions

Public stock can be used as currency to acquire other companies. Instead of paying cash, public companies can offer their shares, which have a clear market value and can be easily traded by the acquired company's shareholders.

Understanding the Primary Market: Where Shares Are Born

The primary market is where securities are created and sold for the first time. This is the birthplace of stocks, bonds, and other financial instruments. In an IPO, the primary market is where the company actually raises money.

How the Primary Market Works in an IPO

When a company decides to go public, it works with investment banks (underwriters) like Goldman Sachs, Morgan Stanley, or JPMorgan Chase. These banks help determine the IPO price, create the prospectus, market the shares to institutional investors, and facilitate the actual sale.

The Primary Market in Action: Instacart's 2023 IPO

When Instacart (Maplebear Inc.) went public in September 2023, it priced its shares at $30 each. The company and its underwriters sold these shares directly to institutional investors and some retail investors. The money from these sales went directly to Instacart, allowing them to raise approximately $660 million. This transaction happened in the primary market.

Key Characteristics of the Primary Market

One-time transaction: Each security is sold only once by the issuing company
Money goes to the company: Proceeds from sales directly fund the issuing organization
Price is predetermined: The IPO price is set through negotiation between the company and underwriters based on valuation
Limited access initially: Often, institutional investors get first access before retail investors

Understanding the Secondary Market: Where Shares Change Hands

After the IPO concludes, the action moves to the secondary market. This is what most people think of when they imagine the stock market—the New York Stock Exchange, NASDAQ, or your favorite trading app.

The secondary market is where investors buy and sell securities among themselves. The company that originally issued the stock doesn't receive any money from these transactions. Instead, investors trade with each other, with prices determined by supply and demand.

Secondary Market Example: Trading Reddit Stock

Reddit went public in March 2024 with an IPO price of $34 per share. That was the primary market transaction. But minutes after trading began on the NYSE under ticker symbol RDDT, the stock was trading at $47, and over the following days, it fluctuated between $37 and $65. All of these trades after the IPO happened in the secondary market between investors. Reddit received money only from the initial $34 offering, not from any subsequent trades.

Key Characteristics of the Secondary Market

Continuous trading: Shares are bought and sold repeatedly among investors
Money flows between investors: The company doesn't receive proceeds from these transactions
Market-determined prices: Prices fluctuate based on supply, demand, company performance, and market sentiment
High liquidity: Investors can easily buy or sell shares during trading hours
Accessible to everyone: Anyone with a brokerage account can participate

Primary Market vs. Secondary Market: Side-by-Side Comparison

🏛️ Primary Market

Securities are issued for the first time
Money goes to the issuing company
Price is fixed (IPO price)
Occurs once per offering
Organized by investment banks
Examples: IPOs, bond offerings, rights issues

📊 Secondary Market

Securities are traded among investors
Money flows between buyers and sellers
Price fluctuates with supply/demand
Occurs continuously
Facilitated by stock exchanges
Examples: NYSE, NASDAQ, BSE, NSE

The IPO Process: From Private to Public

Understanding the journey from a private company to a publicly traded stock helps investors appreciate the complexity and significance of an IPO.

Step 1: Decision and Planning

The company's board and executives decide to pursue an IPO. They evaluate market conditions, company readiness, and strategic timing. This phase includes selecting underwriters and assembling legal and financial advisors.

Step 2: Due Diligence and Regulatory Filings

The company files a registration statement with regulatory bodies like the Securities and Exchange Commission in the United States. This includes the S-1 form, which contains detailed financial information, risk factors, and business plans. Public scrutiny begins here.

Step 3: Roadshow and Marketing

Company executives and underwriters travel to meet with institutional investors, presenting the company's story and growth prospects. This builds demand and helps gauge investor interest, which influences the final IPO price.

Step 4: Pricing

Based on demand from the roadshow and market conditions, the company and underwriters set the final IPO price. This is a crucial decision that balances raising maximum capital with ensuring strong first-day performance.

Step 5: Going Public

The stock begins trading on the chosen exchange. The opening price may differ from the IPO price based on market demand. This is the transition from primary to secondary market.

Recent IPO Trends and Examples

The IPO market evolves constantly, influenced by economic conditions, investor appetite, and technological innovation. Recent years have seen fascinating developments.

Notable Recent IPOs

Arm Holdings (September 2023): The chip designer's IPO raised $4.87 billion at a valuation of over $54 billion, marking one of the largest tech IPOs in recent years.

Cava Group (June 2023): The Mediterranean restaurant chain priced at $22 and soared to $43.78 on its first day, demonstrating strong retail investor enthusiasm for consumer brands.

Birkenstock (October 2023): The iconic sandal maker went public at $46 per share, showing that even 250-year-old companies can successfully tap public markets.

Why Should Investors Care About These Markets?

Understanding the distinction between primary and secondary markets fundamentally changes how you approach investing. Here's why it matters for your investment strategy.

📉 Evaluating IPO Opportunities

Not all IPOs are good investments. Companies often go public when market conditions are favorable and valuations are high. Understanding the primary market process helps you assess whether an IPO is fairly priced. Research shows that many IPOs underperform the broader market in their first few years of trading.

💡 Understanding Price Movements

In the secondary market, stock prices reflect investor sentiment, company performance, and countless other factors. Recognizing that your trades don't directly benefit or harm the company (except through stock-based compensation impacts) helps you make more rational decisions.

🎯 Strategic Investment Timing

Some investors prefer waiting months or quarters after an IPO to invest, allowing the initial hype to settle and the company to establish a trading history. Others seek IPO access through their brokers. Understanding both markets helps you choose your approach.

Key Takeaways

An IPO (Initial Public Offering) is when a private company first sells shares to the public, becoming a publicly traded entity
The primary market is where new securities are created and sold, with proceeds going directly to the issuing company
The secondary market is where investors trade existing securities among themselves, with no money flowing to the company
Companies go public to raise capital, provide liquidity to early investors, enhance credibility, and create acquisition currency
Not all IPOs are good investments—research thoroughly and consider waiting for post-IPO volatility to settle
Understanding these markets helps you make more informed investment decisions and better evaluate opportunities

Ready to Start Your Investment Journey?

Now that you understand how IPOs work and the difference between primary and secondary markets, you're better equipped to navigate the stock market. Whether you're considering investing in the next hot IPO or buying established stocks in the secondary market, knowledge is your most valuable asset.

Remember: successful investing isn't about catching every IPO—it's about understanding the fundamentals, researching thoroughly, and making informed decisions aligned with your financial goals.