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An IPO is when a private company sells shares to the public for the first time. Here's how the process works, IPO pricing, lock-up periods.
This guide is designed for first-pass understanding. Start with core terms, then apply the framework in your own account workflow.
An IPO; Initial Public Offering — is the moment a private company sells shares to the public for the first time. It's one of the most hyped events in finance, often accompanied by breathless media coverage and FOMO-inducing first-day pops. But the reality of IPO investing is more complicated; and less profitable for retail investors — than the headlines suggest.
An Initial Public Offering (IPO) is the process by which a privately held company sells shares to the public for the first time on a stock exchange. The company works with investment banks to file an S-1 registration statement with the SEC, conducts a roadshow to gauge investor demand, and sets an offering price. While IPOs generate excitement and first-day "pops," research consistently shows that IPOs as a group underperform the broader market over the first 3-5 years.
An IPO is the process by which a privately held company becomes publicly traded on a stock exchange. Before an IPO, the company's shares are owned by founders, employees, and private investors (venture capitalists, private equity firms). After the IPO, anyone with a brokerage account can buy shares.
For the company, an IPO raises capital (money from selling new shares), provides liquidity for early investors and employees who want to cash out, and establishes a public market value. For investors, it's the first opportunity to buy shares in a company that was previously inaccessible.
Going public also brings significant new obligations: quarterly earnings reports, SEC filings, board governance requirements, and constant public scrutiny of the company's performance. This is why some successful companies (like Stripe or SpaceX) choose to stay private as long as possible.
Taking a company public is a months-long process involving multiple parties:
An Initial Public Offering (IPO) is when a private company sells shares to the public for the first time on a stock exchange. The company works with investment banks to set an offering price, and shares begin trading on the exchange on the IPO date.
IPO shares are often overhyped and overpriced on the first day of trading. Research shows that IPOs underperform the broader market over the first 3-5 years on average. If you want exposure, consider waiting 3-6 months for the hype to settle and financial data to emerge.
A lock-up period (typically 90-180 days) prevents company insiders and early investors from selling their shares immediately after the IPO. When the lock-up expires, a flood of insider selling can push the stock price down significantly.
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After an IPO, company insiders; founders, executives, employees, and early investors — are typically prohibited from selling their shares for 90 to 180 days. This is called the lock-up period.
Lock-up expirations are important for investors because they suddenly increase the supply of tradeable shares. When insiders who've been waiting months to cash out are finally allowed to sell, it can create significant selling pressure and drive the stock price down.
Smart IPO investors pay attention to lock-up expiration dates. A stock that performed well in its first few months can sell off sharply when millions of insider shares suddenly hit the market. This is a predictable event that catches retail investors off guard regularly.
You've seen the headlines: "Company X soars 50% on first day of trading!" These first-day pops are common, but they're not the gift to retail investors they appear to be.
Here's why pops happen: underwriters intentionally price the IPO below what they expect the market will pay. This serves multiple purposes:
The uncomfortable reality: if the stock pops 50% on day one, the company left money on the table; they could have raised 50% more capital. And retail investors who buy after the pop are paying a premium over the institutional price.
| Feature | Traditional IPO | Direct Listing | SPAC |
|---|---|---|---|
| New Shares Issued | Yes — company raises capital | No — existing shares only | Yes — via merger |
| Underwriter Fees | 3–7% of proceeds | None | Lower, but sponsor gets 20% |
| Timeline | 6–12 months | 3–6 months | 3–6 months (post-SPAC IPO) |
| Lock-Up Period | 90–180 days | None (or shorter) | Varies |
| Retail Access | Limited at offering price | Equal — open market from day one | Available pre-merger at ~$10 |
Traditional IPOs aren't the only way to go public. Two alternatives have gained attention:
Direct listings: The company lists its existing shares on an exchange without issuing new shares or using underwriters. No money is raised, no shares are created — insiders simply begin selling their existing shares to the public. Spotify and Coinbase went public this way. It's cheaper (no underwriter fees) and more democratic (no preferential allocation to institutional investors), but it provides no guaranteed demand and can be volatile.
SPACs (Special Purpose Acquisition Companies): A "blank check" company raises money through its own IPO, then uses that money to merge with a private company, effectively taking it public through the back door. SPACs boomed in 2020-2021 as a faster alternative to traditional IPOs.
The SPAC wave didn't end well for most investors. Many SPAC-merged companies were overhyped and underperformed dramatically after going public. Research shows that the average SPAC has significantly underperformed the market. The SPAC sponsors made money through favorable deal terms; retail investors largely subsidized their returns.
This is where IPO investing gets uncomfortable. While first-day pops grab headlines, the longer-term performance of IPOs is consistently disappointing:
There are notable exceptions; Amazon, Google, and Facebook all went on to massive post-IPO gains. But for every Amazon, there are dozens of IPOs that faded into mediocrity or went to zero. Survivorship bias makes IPO investing look better than it is because you remember the winners and forget the losers.
Historically, retail investors had almost no access to IPO shares at the offering price. All the shares went to institutional investors, and retail traders could only buy after the stock started trading; often at a significant premium.
This has improved somewhat:
Even with these programs, retail investors typically get small allocations of the most popular IPOs and larger allocations of less desirable ones. The best IPOs are oversubscribed, and the allocation process still favors institutional clients.
Looking at high-profile IPOs illustrates the range of outcomes:
The pattern is consistent: excitement at launch, followed by a reality check as the market digests the company's actual financials and growth trajectory.
For most investors, the honest answer is no — at least not at the time of the IPO. Here's why:
A better approach: wait 6-12 months after an IPO before buying. Let the lock-up expire, read a few quarterly earnings reports, and let the stock find its true market value. You'll miss the first-day pop but avoid a lot of the first-year underperformance.
If an exciting IPO catches your eye, read the S-1 filing on the SEC's EDGAR website before investing. Pay attention to revenue growth, profitability (or lack thereof), customer concentration, and how the company plans to use the IPO proceeds. If the S-1 is full of buzzwords and light on financials, that's a red flag.
If you want exposure to newly public companies without the single-stock risk, consider an IPO ETF (like the Renaissance IPO ETF) that holds a basket of recent IPOs. You'll get diversified exposure to the IPO market without betting everything on one company.
Whatever you decide, track your IPO investments alongside everything else in Clarity. It's easy to get caught up in the excitement of a new stock and lose sight of how it fits into your overall portfolio. Seeing your speculative positions as a percentage of your total investments keeps things in perspective.
This article is educational and does not constitute investment advice. Past performance does not guarantee future results. Consider consulting a financial advisor before making investment decisions.
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