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The company receives its full funding amount during the IPO, where it sells its shares to institutional investors.

Let's say it sold 1 million shares.

Then, when the shares start trading on the secondary market, where do these shares come from?

Assuming that all investors have a lock-up period, then they cannot sell their shares on the secondary market until maybe 6 months out.

So where do all the shares trading on the secondary market come from?

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  • You could always short-sell them - borrowing them for six months. – Aganju Apr 19 at 3:17
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It is common for private placement investors to be able to start trading at least some of their stock right away, while employees usually have restricted shares that cannot be traded for some period of time.

When I worked in the business we tried to get our private placement investors to follow a disciplined exit strategy so that they could sell shares gradually so as to not harm the stock early in it's debut, and while there was no requirement for them to do this, the ones who didn't might not get as many calls to participate in future offerings.

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the 1 million shares are what is traded

sometimes there is a separate lockup where employees can sell some shares first but it’s usually not that much, but enough to flood the market for 1-2 days or if there is big buying it can still go up

sometimes even a few days after an ipo some more shares from employees are released but this is rarer

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