IPO investing for regular people

An IPO is a company selling shares to the public for the first time — and the financial media covers hot ones like moon landings. The pitch writes itself: get in early on the next great company. The mechanics, unfortunately, are built so that regular investors get in exactly LATE — after the discount, at the peak of hype, in the shares insiders are preparing to sell.

How the machine actually works

Investment banks price the IPO and allocate shares before trading begins — mostly to institutions and favored clients. That offering price is deliberately set below expected demand, producing the famous 'first-day pop' (historically averaging 10–20%). The pop goes to whoever got allocated shares at the offering price. Regular investors buying at the open pay the popped price. You're not early; you're the demand the discount was measuring.

What the long-run data says

Professor Jay Ritter, who has tracked every US IPO for decades, finds that IPOs bought at the first-day closing price have underperformed comparable stocks by several percentage points per year over the following 3–5 years. The average masks a lottery-like skew: a few (the Googles) become legendary, most languish, and many crater. There's also the lockup: 90–180 days after the IPO, insiders become free to sell, and heavy supply routinely hits right as early excitement fades.

If you're still tempted, at least do it like this

• Wait for the lockup to expire (roughly 6 months) — you'll buy after insider supply, often at better prices, with two quarters of real earnings reports to read.
• Read the S-1 filing, especially 'Risk Factors' and whether the company makes money. Hype survives contact with the S-1 less often than you'd think.
• Cap any single IPO at 1–2% of your portfolio — this is speculation and should be sized like it.
• Ignore 'IPO access' features in trading apps: retail allocation in genuinely hot deals is tiny, and generous allocation in a deal is itself a warning sign — the pros passed.
• Never buy the first print with a market order. Opening prices on IPO day are chaos; if you must, use limit orders.

The special cases: SPACs and direct listings

Two variants deserve their own warnings. SPACs — blank-check companies that merge private firms onto the market — showed even worse post-deal returns than traditional IPOs in the 2020–2021 wave, with the structure's fees and dilution borne mostly by late retail holders. Direct listings skip the banks' pricing (no pop to miss) but also skip the vetting and stabilization. In both cases the rule holds: novel structure plus heavy marketing equals worse average outcomes for the last money in.

The bottom line

IPO investing for regular people is a game where the discount goes to insiders, the hype price goes to you, and the data shows years of underperformance from day-one buying. If a newly public company genuinely excites you, wait out the lockup, read the filings, and size it as speculation. Or relax entirely: your index fund is already standing at the exit of the IPO casino, quietly collecting every company that survives it.

Case studies the pitch decks leave out

Recent history supplies both sides honestly. Investors who bought Rivian at its 2021 first-day prices near $170 watched it trade below $15 within a year — a 90%+ drawdown from the hype peak. Robinhood priced at $38 in 2021, sank under $8 within months, and took years to recover. Uber went public at $45 in 2019 and spent its first three years below the offer price before eventually working out for the patient. Meanwhile the counterexamples that fuel the dream — buying Amazon or Google at IPO — worked precisely because the buyers held for a decade-plus through repeated 50% drawdowns, something almost no hype-window buyer actually does. The pattern across the full data set is stark: first-day pops go overwhelmingly to institutions allocated at the offer price, while retail buyers who purchase in the opening days at market prices have, on average, underperformed the index badly over the following three years. If a company is truly great, it will still be great — and index-fund investors will own it automatically — five years after the confetti.

Patience costs nothing here: the lockup expiration around day 180 routinely delivers better prices than the opening week, and by then the company has filed real quarterly numbers to judge instead of a roadshow narrative.

Excitement is the most expensive thing the market sells, and IPO week is its flagship store.