IPO Investing: How to Buy Shares When a Company Goes Public

The IPO Process

The IPO process typically takes 6 to 12 months. The company hires investment banks — typically Goldman Sachs, Morgan Stanley, and JPMorgan — as lead underwriters. The banks help the company file an S-1 registration with the SEC, which includes detailed financials, risk factors, and the proposed ticker symbol and exchange. Management embarks on a roadshow, presenting to institutional investors (mutual funds, pension funds, hedge funds) to gauge demand. Based on feedback, the underwriters set an initial price range, then build a book of orders to determine the final offer price. On IPO day, the stock begins trading on its exchange (NYSE or Nasdaq). The process is designed to price the IPO at a level that ensures a first-day pop, rewarding institutional participants and generating positive publicity. Learn about stock splits and share structure →

Getting IPO Allocation

Retail investors rarely receive IPO shares at the offer price. Underwriters allocate the vast majority of shares to their institutional clients and ultra-high-net-worth individuals. This is a core function of investment banking relationships — banks reward clients who pay for research, trading, and advisory services with coveted IPO allocations. However, some brokers now offer retail IPO access: Robinhood's IPO Access, SoFi's IPO platform, and Fidelity's IPO subscription service allow retail investors to indicate interest in IPO shares. Allocation is not guaranteed and is typically proportional to your account size. Most retail investors end up buying IPO shares on the open market on the first day — often at a significant premium to the offer price. Understand how companies return capital →

The Dangers of First-Day Buying

Buying IPO shares on the first day of trading carries significant risks. The first-day pop can create euphoria, with the stock gapping up 50% to 100% before crashing back within weeks. Many retail buyers purchase at the peak of first-day frenzy, only to watch the stock decline as early investors sell. Lockup agreements prevent insiders (founders, VCs, employees) from selling their shares for 90 to 180 days after the IPO. When the lockup expires, a flood of selling pressure often hits the stock. Additionally, companies with limited public track records have optimistic prospectus projections that may not materialize. The underwriters can support the stock price for 25 days through the Green Shoe (over-allotment) option, but once that support ends, the stock finds its natural level. Read earnings reports to evaluate post-IPO performance →

Successful and Failed IPOs

Google's 2004 IPO at $85 per share is one of the most successful in history — after splits, those shares would be worth over $175 today. Amazon went public at $18 in 1997 and would be worth over $200 after splits. Apple's 1980 IPO at $22 would be worth over $200 after splits. These companies grew into dominant businesses with massive competitive advantages. On the other side: Pets.com went public in 2000 and declared bankruptcy 9 months later. Uber went public at $45 in May 2019 and traded below its IPO price for over three years. WeWork's IPO was famously canceled after the prospectus revealed massive losses and governance concerns. The key lesson: IPO performance depends entirely on the underlying business quality and the price paid. Compare individual stock investing to index investing →

How do I buy IPO shares as a retail investor?

Your options are limited but improving. Robinhood, SoFi, and Fidelity offer retail IPO access programs where you can indicate interest in buying shares at the offer price. Allocation is not guaranteed and depends on your account size and demand. Alternatively, you can buy IPO-focused ETFs like the Renaissance IPO ETF (IPO) or the First Trust US Equity Opportunities ETF (FPX), which hold baskets of recently public companies. The most common approach for retail investors is simply buying shares on the open market after trading begins — but be cautious of first-day hype and premium pricing. Consider waiting for the lockup expiration or the first earnings report before establishing a position.

Should I buy IPO stocks on the first day?

Historical data suggests caution. The average first-day return is 15% to 20%, but stocks that pop dramatically on day one often underperform in the following months. Studies show that IPO stocks, as a group, underperform the market over 1-year and 3-year horizons. The best approach is to evaluate the company as you would any investment — analyze the business model, competitive advantages, financial health, and valuation. If the company is sound at a reasonable price, the timing of your purchase (day one vs. month six) matters far less than the quality of the business. Renaissance Technologies, one of the most successful quant funds, typically waits 6 to 12 months before buying IPO stocks — letting the initial volatility and lockup-driven selling subside.

What happens after the IPO lockup period?

The lockup period typically lasts 90 to 180 days from the IPO date. During this time, insiders (founders, executives, early investors, employees) cannot sell their shares. When the lockup expires, these shareholders are free to sell, often creating significant selling pressure. The prospectus specifies the exact lockup expiration date. It is common for IPO stocks to decline 10% to 20% in the weeks following lockup expiration as insiders diversify or cash out. Some companies announce secondary offerings concurrent with lockup expiration to manage the selling process. For long-term investors, lockup expiration can create a buying opportunity — you can acquire shares from motivated sellers at potentially discounted prices.

How do I evaluate an IPO prospectus?

Focus on three sections of the S-1 filing: the business description (what does the company do, what is its competitive advantage, how does it make money), the risk factors (what could go wrong, often 20-30 pages of disclaimers), and the financial statements (revenue growth, gross margins, operating losses, cash burn rate). Key metrics: revenue growth rate (40%+ is strong for a tech IPO), gross margin (70%+ for software, 30-50% for hard tech), customer concentration (danger if one customer is over 10% of revenue), and total addressable market (TAM). Be skeptical of non-GAAP metrics that mask losses. The prospectus is written by lawyers for the company — it will present the most optimistic picture while technically disclosing all risks. Read the risk factors carefully to understand what keeps management up at night.

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