Investing in a company before it becomes a household name has a certain thrill to it—just ask anyone who bought into Amazon or Google during their early days. That’s the promise of an IPO, or Initial Public Offering: the chance to invest in a company as it makes its debut on the stock market. With all the media buzz and the potential for rapid gains, IPOs often attract a lot of attention from both new and seasoned investors.
But while IPOs can offer exciting opportunities, they also come with unique risks and uncertainties that can trip up even the most confident investor. Before jumping into the next big public offering, it’s important to understand how IPOs work, why companies go public, and how you can evaluate whether an IPO is truly a smart investment—or just hype.
In this post, we’ll break down everything you need to know about investing in IPOs so you can make informed, strategic decisions when opportunity knocks.
What is an IPO?
An Initial Public Offering (IPO) marks the first time a private company offers its shares to the public on a stock exchange. It’s a significant milestone in a company’s growth journey, signaling that it’s ready to raise capital from a wider pool of investors. By going public, the company can access large amounts of funding to fuel expansion, invest in new products, reduce debt, or simply allow early investors and founders to cash out some of their equity.
The IPO process begins long before a company rings the opening bell. It typically involves hiring investment banks—called underwriters—to help determine the company’s valuation, draft the necessary filings, and generate interest among institutional investors. One of the key documents in this process is the S-1 filing submitted to the U.S. Securities and Exchange Commission (SEC), which provides a detailed look at the company’s financials, business model, risks, and growth strategy.
Once approved, the company sets a price range for its shares and decides how many will be sold. After the shares are issued, they begin trading on the stock market, often with a lot of volatility as supply and demand determine the stock’s true market value.
IPOs aren’t just financial events—they’re cultural moments too. Many well-known companies have had headline-grabbing public debuts. Think of Airbnb, which soared on its first day of trading, or Uber, which faced challenges despite high expectations. These examples highlight the unpredictable nature of IPOs and why understanding the full picture is so important before investing.
Why Investors Are Attracted to IPOs
There’s something undeniably exciting about being among the first to invest in a company as it goes public. For many investors, IPOs offer the allure of getting in early—before a company becomes a household name or sees its stock price potentially skyrocket. This sense of exclusivity can be especially enticing, making IPOs feel like golden opportunities.
The biggest draw is often the potential for significant returns. Some IPOs have delivered impressive performance in their early trading days, with shares jumping 50% or more shortly after hitting the market. These success stories—like Snowflake, Zoom, or Beyond Meat—fuel the belief that IPO investing can lead to quick and substantial profits, especially if the investor manages to buy shares at or near the IPO price.
Beyond financial gain, IPOs are also wrapped in media hype and investor buzz. Financial news outlets, analysts, and social media channels frequently cover upcoming IPOs, creating a sense of urgency and excitement. This visibility can amplify demand for the stock, especially among retail investors eager not to miss out on the “next big thing.”
Additionally, IPOs often represent companies at pivotal moments in their growth. These are usually businesses with compelling stories, innovative products, or disruptive business models—traits that naturally attract investor interest. For some, buying into an IPO is about more than just the stock; it’s about supporting a brand or vision they believe in.
However, while the upside can be tempting, it’s important to remember that IPO investing isn’t a guaranteed path to wealth. Like any investment, it comes with risks—something we’ll explore in the next section.
The Risks of IPO Investing
While IPOs can offer a shot at early gains, they also come with a fair share of risks—many of which are easy to overlook amid the excitement. In fact, some IPOs that begin with strong market enthusiasm can quickly lose steam, leaving investors holding shares worth far less than they paid. Understanding these risks is crucial before jumping in.
One of the biggest challenges with IPOs is volatility. Newly public stocks often experience large price swings in their first days or weeks of trading. This can be due to market speculation, shifting investor sentiment, or simply the fact that the stock is finding its footing in the public market. Unlike established companies with predictable earnings and stock behavior, IPOs are relatively untested and can react strongly to news—good or bad.
Another major risk is limited financial history. Since many IPOs involve younger companies, there might not be years of earnings reports or performance data to analyze. Even with the required disclosures in the S-1 filing, investors are often betting on future potential rather than proven profitability. This makes it harder to assess whether the company is overvalued or poised for sustainable growth.
There's also the issue of insider activity and lock-up periods. Most insiders—like founders, executives, and early investors—are restricted from selling their shares for a set period after the IPO (typically 90 to 180 days). Once this lock-up period ends, a flood of shares can hit the market, potentially driving down the stock price as insiders cash out.
Finally, many IPOs are surrounded by hype and media excitement, which can cloud investor judgment. A high-profile debut doesn’t always translate to long-term success. In fact, history has shown that some of the most talked-about IPOs (like WeWork or Robinhood) struggled to meet lofty expectations, resulting in disappointing post-IPO performance.
In short, while IPOs can be rewarding, they’re far from a sure thing. The next step in smart IPO investing is knowing how to evaluate these opportunities carefully—something we’ll dive into in the following section.
How to Evaluate an IPO
If you’re considering investing in an IPO, taking the time to thoroughly evaluate the offering is one of the smartest moves you can make. Unlike well-established public companies with years of financial history, IPOs often involve companies that are still in a growth phase—sometimes not yet profitable—making due diligence even more important.
A great place to start is with the company’s S-1 filing, which is publicly available through the U.S. Securities and Exchange Commission (SEC). While it can be a dense read, this document is packed with critical information: business model, revenue sources, risk factors, competition, financial statements, and the intended use of IPO proceeds. Pay special attention to red flags like ongoing losses, declining revenue, or vague growth plans.
Next, take a close look at the company’s fundamentals. Is the company growing revenue consistently? Is it profitable, or at least on a clear path to profitability? What are its margins, debt levels, and cash flow? These insights can give you a clearer picture of whether the business is financially sound or still in a high-risk stage.
The management team also plays a crucial role. A strong leadership group with a solid track record can inspire confidence. Look into the CEO and key executives—have they successfully led other companies? Do they have deep experience in the industry? IPOs often involve founders handing over more control to public investors, so evaluating leadership is key to understanding how the company may evolve.
Also consider the company’s competitive landscape and market opportunity. Is this a crowded space, or does the IPO company offer a unique value proposition? A great product isn’t always enough if the company lacks a competitive edge or clear differentiation. Understanding the market size and potential for growth helps you assess whether the company’s long-term prospects justify its IPO valuation.
Finally, look at the valuation itself. Just because a company is going public at a high price doesn’t mean it’s worth it. Compare its metrics—like price-to-sales or price-to-earnings ratios—with similar companies in the same sector. If the valuation seems too high relative to peers, it could signal an overheated offering driven more by hype than solid fundamentals.
Evaluating an IPO takes time and effort, but it can help you separate promising opportunities from risky bets. Up next, we’ll walk through how you can actually participate in an IPO, step by step.
How to Participate in an IPO
Participating in an IPO used to be the exclusive domain of large institutional investors, but in recent years, access has expanded—especially for retail investors. That said, getting in at the IPO price still isn’t as simple as placing a buy order like you would for a regular stock. The process has a few extra steps and some key considerations.
To start, you’ll need a brokerage account with a firm that offers IPO access to individual investors. Not all brokerages do, but platforms like Fidelity, Charles Schwab, TD Ameritrade, and Robinhood have started opening the door to IPO allocations for eligible clients. Each platform has its own requirements, which often include minimum account balances, trading history, or an investor profile that meets certain criteria.
If your brokerage supports IPO investing, you’ll typically need to express interest in a particular IPO before the offering date. This is usually done through an “Indication of Interest” (IOI) form, where you specify how many shares you’d like to buy. Keep in mind that expressing interest doesn’t guarantee allocation—demand often exceeds supply, especially for high-profile IPOs, so you may receive fewer shares than requested, or none at all.
It’s also important to understand the pricing dynamics. IPO shares are priced the night before the stock begins trading publicly. If you’re allocated shares, they’ll appear in your account at the offering price. However, once the stock hits the open market, prices can move quickly—sometimes jumping significantly above the IPO price within minutes of trading. This makes timing and strategy especially important.
For investors who don’t receive an allocation or prefer to wait, there’s always the option to buy the stock on the open market once it starts trading. This can sometimes be a safer approach, as it allows you to see how the market responds to the IPO before making a move. However, it can also mean paying a premium if the stock surges right out of the gate.
Finally, be aware of IPO flipping restrictions. Some brokerages penalize clients who buy IPO shares and sell them immediately, which they may view as short-term speculation. If you’re planning to participate, make sure to read your brokerage’s terms and understand the rules.
Participating in an IPO can be an exciting way to diversify your portfolio—but knowing how to navigate the process and manage expectations is key. In the next section, we’ll look at how IPO investing stacks up against more traditional approaches in the secondary market.
IPO vs. Secondary Market Investing
When it comes to buying into a company, timing matters—but it’s not always about being first. While IPOs offer the chance to invest at the beginning of a company’s public journey, secondary market investing—buying shares after they’ve begun trading on the open market—can be just as strategic, and in some cases, even wiser.
One of the biggest differences is the amount of information available. IPO investors often have to make decisions based on limited financial history and optimistic projections. But once a company is trading publicly, it’s required to file quarterly reports, host earnings calls, and operate under the scrutiny of analysts and shareholders. This transparency can make it easier to evaluate whether the business is living up to expectations.
Secondary market investing also allows you to see how the stock behaves in real time. IPOs are often volatile in their early days, with prices swinging dramatically as the market tries to determine fair value. By waiting, investors can avoid the rollercoaster and enter once the stock has settled and developed a more consistent trading pattern.
In some cases, patience pays off. Many IPOs that debut at sky-high valuations experience a post-IPO dip after the initial hype fades. Investors who wait can potentially buy in at a lower price—once the excitement wears off and the stock finds firmer ground. Facebook (now Meta) is a good example; its shares fell significantly after its IPO before eventually becoming one of the market’s top performers.
On the flip side, high demand IPOs sometimes surge and keep climbing, which can leave latecomers paying more than early investors. However, chasing these stocks during their euphoric phase can also lead to disappointment if prices correct sharply in the weeks or months following.
Ultimately, the choice between IPO and secondary market investing depends on your risk tolerance, investment goals, and research habits. IPOs offer early access and potential upside, but come with uncertainty. Secondary market investing offers more data and often a smoother ride—but sometimes at a higher price. Either way, the most important thing is to invest with a clear strategy, not just because of the fear of missing out.
Tips for First-Time IPO Investors
If you're new to IPO investing, it’s easy to get swept up in the excitement and urgency that often surrounds a public debut. But to make smart decisions—and avoid common missteps—it’s essential to approach IPOs with a clear, level-headed strategy. Here are some key tips to keep in mind before diving in.
First and foremost, set realistic expectations. While it’s true that some IPOs double in value within days, many others underperform or even lose value over time. The hype around an IPO doesn’t always reflect the company’s true worth or long-term potential. Go into it understanding that IPOs are not a guaranteed path to quick riches—they're a high-risk, high-reward opportunity.
Next, don’t invest based on headlines or social media buzz alone. Instead, do your homework. Read the company’s S-1 filing, understand its financials, and assess whether it fits into your broader investment strategy. Just because a company is well-known or has a popular product doesn’t mean its stock will perform well. Fundamentals matter—sometimes more than the brand name.
It’s also a good idea to start small. If it’s your first time investing in an IPO, consider limiting your exposure to just a small percentage of your portfolio. This lets you participate in the potential upside without putting too much at risk. You can always buy more shares later if the company proves itself in the public market.
Another smart move is to diversify your investments. Don’t put all your capital into one high-risk IPO. Spread your investments across various industries and asset types to cushion your portfolio against unexpected drops. IPOs are inherently more volatile, so diversification can help balance out that risk.
Lastly, be wary of making emotional decisions. The fear of missing out (FOMO) is a powerful force, especially during high-profile IPOs. But investing based on emotion rather than analysis can lead to regret. Stay grounded, stick to your investment plan, and don’t let hype override your judgment.
By taking a thoughtful, informed approach, first-time IPO investors can avoid common pitfalls and position themselves to make smarter, more confident decisions—whether they’re buying into the next big thing or choosing to sit one out.
Conclusion
Investing in IPOs can be an exciting way to get involved in a company’s early days on the public market—but it’s not a decision to take lightly. While there’s certainly the potential for strong returns, IPOs also come with unique challenges: limited information, high volatility, and the ever-present risk of buying into hype rather than substance.
By understanding what an IPO is, why companies go public, and how the process works, you can better evaluate each opportunity on its own merits. Taking the time to research the company’s fundamentals, management team, competitive positioning, and valuation helps you move beyond the headlines and into more thoughtful investing territory.
Whether you’re able to participate at the IPO price or decide to wait and invest through the secondary market, the key is to align your IPO strategy with your overall financial goals and risk tolerance. Not every IPO will be a winner—but with the right approach, you can minimize the risks and increase your chances of long-term success.
At the end of the day, smart investing—IPO or otherwise—is about being informed, patient, and strategic. So if you’re thinking about dipping your toes into the IPO waters, take the time to do your homework, stay objective, and invest with confidence.
Frequently Asked Questions (FAQs)
1. What is an IPO?
An IPO, or Initial Public Offering, is the process by which a privately-held company offers its shares to the public for the first time. This allows the company to raise capital from public investors, which can be used for expansion, paying down debt, or other business needs.
2. Can anyone invest in an IPO?
While anyone can invest in an IPO, access to the offering is often restricted to those with brokerage accounts that offer IPO access. Some brokerages may limit IPO participation to investors with a certain level of account balance or trading activity. However, you can also buy shares once the stock starts trading on the open market.
3. What are the risks of investing in an IPO?
The risks of IPO investing include high volatility, a lack of historical financial data, the possibility of overvaluation, and the uncertainty of how the market will react to the company’s debut. Many IPOs experience significant price swings in the early days of trading.
4. How do I evaluate an IPO before investing?
To evaluate an IPO, you should review the company’s S-1 filing (submitted to the SEC), which provides detailed information about the business model, financial performance, risks, and management. Also, assess the company’s growth potential, competitive landscape, and valuation relative to industry peers.
5. What is the difference between an IPO and secondary market investing?
An IPO occurs when a company first offers its shares to the public, while secondary market investing involves buying shares in companies that are already publicly traded. Secondary market investing gives you more transparency and financial data to base your decisions on, as opposed to the limited information available during an IPO.
6. How do I participate in an IPO?
To participate in an IPO, you need to have an account with a brokerage that offers IPO access. You can express interest in the IPO through the brokerage, but allocations are not guaranteed. If you miss out on the IPO price, you can also buy shares once the stock starts trading on the open market.
7. Should I invest in IPOs right away or wait?
It depends on your risk tolerance and strategy. IPOs can be volatile, with prices fluctuating significantly in the early days of trading. If you prefer more stability, waiting until after the initial offering may give you a better understanding of the stock’s true value. However, if you believe in the company’s potential and are willing to accept the risk, investing early could offer significant upside.
8. Are all IPOs successful?
No, not all IPOs are successful. While some companies see their stock prices soar after going public, others may struggle due to poor performance, overvaluation, or market conditions. It’s important to evaluate each IPO individually and avoid investing solely based on hype.
9. Can I buy shares in an IPO before the stock is listed?
In most cases, you need to be an eligible investor through a brokerage that participates in the IPO process to buy shares before they are listed. Alternatively, you can wait for the stock to start trading on the secondary market, where shares will be available to everyone.
10. What happens after the IPO lock-up period ends?
After the IPO lock-up period ends (typically 90–180 days), company insiders and early investors are allowed to sell their shares. This can lead to increased supply in the market, which sometimes causes the stock price to drop. It’s important to keep an eye on the lock-up period when evaluating an IPO.