Video Lesson
Prefer watching? This video covers the key concepts from this article.
What Is an IPO?
An Initial Public Offering (IPO) is when a private company sells shares to the public for the first time. It's how companies raise capital for growth and give early investors an exit. Investment banks underwrite the offering and set the initial price.
Why Most Retail Investors Should Be Cautious
IPO prices are set by insiders who know the company best — meaning the deck is stacked against outside buyers. Studies consistently show that IPOs underperform the broader market over 3–5 years on average. The exciting first-day pop often gives way to prolonged decline, especially once the lock-up period expires (90–180 days after listing) and insiders can sell.
How to Evaluate an IPO
- Read the S-1 prospectus: business model, financials, and risks
- Is the company profitable, or burning cash aggressively?
- Who are the major shareholders and when do their lock-ups expire?
- How does the valuation compare to similar public companies?
A Better Strategy for Retail Investors
Rather than buying on day one, consider waiting for the lock-up expiry. This often triggers a sell-off as early insiders cash out, providing a better entry price set by the open market rather than Wall Street. Using a small position size accounts for the elevated uncertainty.
Key Takeaway
Most long-term portfolios don't need IPO exposure to perform well. If you do invest in IPOs, do your homework, keep position sizes small, and exercise patience — the best opportunities often come months after the initial listing.