An Initial Public Offer (IPO) is the sale of shares to the public as a precursor to the shares trading on an exchange for the first time.
An IPO is not the only way in which a company can start trading in its securities, but it is the most common for shares. The shares offered in an IPO are usually a new issue, but they may also be shares held by major shareholders, or a mixture of both.
The process of the IPO can vary but it will involve some sort of application process for shares. The price at which the shares are sold will either be pre-determined or determined by an auction process. An IPO also usually needs a mechanism for deciding how to distribute shares when there are too many applications (the offer is "over-subscribed"). This allotment may be done by pro-rata allocation or by using an auction process.
The terms of any particular IPO are described in detail in the offer document. In fact the level of disclosure available during an IPO tends to be extremely good, and can be better than that of similar listed companies (or the company's own disclosure post-IPO). This results from the need to compensate for the lack of a track record as a listed company.
An IPO would usually be priced low enough to ensure that the entire offer is taken, and they are also usually underwritten.
The fees paid to advisers and underwriters for an IPO are substantial and, along with mergers and acquisition, they are a major source of revenue for investment banks, especially when bullish markets and high valuations tempt private companies to list.
Another major expense of an IPO, especially for smaller companies, arises from the need to publish a prospectus.