The first sale of a company's shares to the public on a stock exchange, allowing the company to raise capital and giving investors access to previously private equity.
An IPO is the process through which a private company becomes publicly traded. The company works with investment banks (underwriters) who determine the offering price, size, and timeline, then market the shares to institutional investors in a 'roadshow' before the public listing. Shares are priced the evening before listing; the opening trade on the exchange often differs substantially from the IPO price.
IPO performance follows predictable patterns on average. First-day 'pops' are common - shares opening significantly above the IPO price as retail and institutional demand exceeds supply at the fixed offering. However, studies consistently show that IPOs underperform the market over the subsequent 3–5 years on average, reflecting overoptimistic pricing driven by underwriter incentives and investor excitement. The best IPO returns tend to go to institutional investors who receive allocations at the offering price, not retail traders who buy in the open market after the pop.
For active traders, IPOs create significant volatility opportunities. Lock-up expirations (typically 90–180 days after IPO, when insiders can first sell their shares) often precede price weakness as large insider sell programs begin. Companies that price at the bottom of their range or update guidance downward shortly after IPO are frequent underperformers. Conversely, companies raising capital during broad market downturns at conservative valuations often represent stronger long-term entries.
Worked Example
A biotech company prices its IPO at USD 18 per share. Institutional demand is strong - the offering is 8× oversubscribed. On day one, the stock opens at USD 31 (a 72% pop). A retail investor who buys at the open pays USD 31. Six months later, the lock-up expiry allows insiders to sell: over three weeks, the stock retreats to USD 22 as insider sell programs execute. The retail buyer's position is down 29% from their entry while IPO allocatees at USD 18 are still up 22% - illustrating the asymmetry between institutional and retail IPO access.