What is an IPO? (Investing in Stocks Before They Go Public)
An Initial Public Offering (IPO) is the “grand opening” of a company to the stock market. It transforms a private company (owned by founders and VCs) into a public one (owned by anyone with cash). While IPOs often generate massive buzz and “pops” on day one, they are dangerous for retail investors. Most regular people cannot buy at the “Offer Price”; they must buy at the “Market Price,” which is often much higher. Here is how the process works and why you should watch the “Lock-Up” date.
1. The Rule: Offer Price vs. Opening Price
This is the biggest misunderstanding in IPO investing.
2. Opening Price (e.g., $40): The price the stock actually starts trading at on the exchange.
The Trap: You see “IPO at $20” on the news, place a market order, and end up buying at $45 because of the “Pop.” You are instantly down if it corrects to $30.
2. The IPO Lifecycle (Checklist)
From a founder’s dream to your portfolio, here is the path.
| Stage | Action | Can You Buy? |
|---|---|---|
| Roadshow | Executives pitch to Wall Street banks to build interest. | NO |
| Pricing Night | Final “Offer Price” is set. Allocations given to VIPs. | Rarely (Some brokers allow it) |
| Listing Day | The “Opening Bell.” Stock trades on NYSE/Nasdaq. | YES (At Market Price) |
3. Timeline: The “Lock-Up” Cliff
Buying an IPO is risky, but holding it through the Lock-Up Expiration is dangerous. Here is why prices often crash 6 months later.
| Time Since IPO | Insider Status | Price Impact |
|---|---|---|
| Day 1 – 179 | Locked | |
| Day 180 (Expiry) | Unlocked | |
| Year 1+ | Normal |
4. Strategy: “IPO Access” Programs
The game is changing slightly for retail investors.
- The Old Way: Only millionaires with Goldman Sachs accounts got IPO allocations.
- The New Way (2026): Brokerages like Robinhood, SoFi, and Webull offer “IPO Access.” They get a small slice of shares to distribute to users at the Offer Price.
- The Catch: It is a lottery. Also, if you “flip” the shares (sell immediately) for a quick profit, these brokers may ban you from future IPOs (the “Flipping Policy”).
5. Warning: The “Hype Cycle”
Don’t believe the prospectus blindly.
⛔ The “Unprofitable” Trap
Many tech companies IPO while losing millions of dollars.
- Why: They need your money to survive. An IPO is often an “exit strategy” for early investors, not an entry point for value.
- Stat: Historically, 60% of IPOs trade below their offering price after 5 years. Boring, established companies are usually safer IPO bets than “the next big thing.”