Definition
In an IPO, a private company works with underwriters (investment banks) to price and sell new shares to public markets. The company receives capital to fund growth; existing shareholders gain the ability to sell into a liquid market. IPOs go through SEC registration (in the US), roadshow marketing to institutional buyers, and price discovery via book-building. Companies typically price IPOs at a discount to expected fair value to ensure demand; the difference sometimes appears as an 'IPO pop' on day 1. Historically, IPOs have underperformed the broader market on average in the 3–5 years post-listing, though top-decile IPOs (like NVDA in 1999, GOOG in 2004) have delivered extraordinary returns. IPO investing carries elevated risk from limited operating history, lockup expirations, and valuation uncertainty.
Example
Facebook (now Meta) IPO'd on May 18, 2012 at $38/share, raising $16B — one of the largest IPOs in history. The stock immediately fell below its IPO price and took over a year to recover, illustrating that even iconic IPOs can be initially disappointing.
Frequently Asked Questions
Can retail investors buy at the IPO price?
Rarely. IPO allocations at the offering price typically go to institutional clients of the underwriting banks. Retail investors usually buy in the open market on day 1, often at a premium to the offering price.
What is a lockup period?
A contractual restriction (typically 90–180 days after IPO) preventing insiders and early investors from selling their shares. Lockup expirations can trigger price declines as new supply hits the market.
Are IPOs a good investment?
On average, no — academic studies show IPO cohorts underperform the market over 3–5 years. However, a small subset of exceptional companies deliver outsized returns, making IPO investing highly right-skewed.