Trading Is a Good Way to Set a Price

Spotify.

When you are a private company your stock doesn't really trade. When you become a public company your stock is listed on a stock exchange and trades all the time, like in microsecond increments. This is a jarring transition. All the people who will be trading your stock need to figure out what price it should trade at. For already-public companies, they look at the price it traded at a second ago, and extrapolate from that. But for newly public companies that data point is not available, and so those companies instead use a large expensive process -- the initial public offering -- to generate a trading price. In the IPO, the company hires bankers to sell a big chunk of stock to investors all at once. This jumpstarts trading in the stock, because all of a sudden there are a bunch of public-markets investors in the stock and they can trade with each other, and it also gives a reference point -- the IPO price -- that they can use to start thinking about the right trading price for the stock.