Every major technology company, pharmaceutical firm, and consumer brand you invest in was once a private company that went public through an IPO. Understanding exactly how that process works — and what it means for your investment — changes how you evaluate newly public stocks.
The initial public offering is one of the most scrutinized events in financial markets. Companies spend months preparing. Investment banks spend weeks selling the deal. The financial press covers every major offering as though it defines the future of an entire industry. And yet most individual investors have only a vague understanding of how the IPO process actually works, why first-day prices often seem disconnected from reality, and what the data shows about IPO performance over time.
This guide walks through the complete process from private company to publicly traded stock — and explains what it all means for investors deciding whether to buy.
Why Companies Go Public
Before getting into the mechanics, it's worth understanding why private companies choose to go public at all. An IPO is not free — it is expensive, time-consuming, and comes with permanent obligations around disclosure, governance, and quarterly reporting that private companies can avoid.
Companies typically go public for one or more of these reasons:
Capital raising: Selling shares to the public generates cash that the company can use for expansion, research, acquisitions, or paying down debt. This is the primary economic rationale.
Liquidity for early investors: Venture capital funds, private equity firms, and early employees hold illiquid private shares for years waiting for a return on their capital. An IPO creates a public market where those stakes can eventually be sold.
Currency for acquisitions: Public company shares can be used to acquire other companies, giving the company a valuable tool for growth beyond cash.
Brand and talent: Being a public company raises a firm's profile and can help with employee recruitment through equity compensation that has real, liquid value.
Stage One: Filing the S-1
The formal IPO process begins when a company files a registration statement — the S-1 — with the Securities and Exchange Commission. This document is the foundational disclosure that tells the public everything material about the company's business, finances, and risks.
The S-1 contains:
- Business description: How the company makes money, its products, customers, markets, and competitive landscape
- Risk factors: A comprehensive list of every material risk to the business — regulatory risk, competitive risk, dependence on key customers, cybersecurity risks, and dozens more. These sections can run 50+ pages and are worth reading carefully.
- Financial statements: Typically three years of audited income statements, balance sheets, and cash flow statements
- Use of proceeds: Where the money raised in the IPO will go
- Management discussion: Executive team's analysis of recent financial results
- Cap table: Who owns the company now, how many shares exist, and what the ownership structure looks like post-IPO
Many companies now take advantage of the JOBS Act confidential filing process, which allows them to submit an initial S-1 to the SEC for review without public disclosure. This gives companies time to work through the review process and make revisions before the document becomes public. The S-1 goes public approximately 15 days before the roadshow.
Stage Two: The Roadshow and Book Building
Once the S-1 is public and the SEC review is complete, the company and its lead underwriters (the investment banks managing the IPO) conduct a roadshow — a multi-city (now often virtual) series of presentations to institutional investors.
The roadshow serves two purposes. First, it is a marketing exercise: company executives present the business case, answer questions from fund managers, and generate excitement about the offering. Second, and more importantly, it is the mechanism through which the offering price is discovered.
During the roadshow, institutional investors submit indications of interest — essentially non-binding bids specifying how many shares they would buy at various price levels. The investment banks aggregate all of these indications in a process called book building. The resulting order book tells the banks where institutional demand is concentrated.
The final IPO price is set the evening before trading begins, typically at the midpoint or high end of the initial price range if demand is strong, or below it if the book is thin.
Who benefits from the allocation process: The banks' most valued institutional clients — large mutual funds, hedge funds, and pension funds with whom the banks have long-standing relationships — receive the largest IPO allocations. Retail investors receive essentially nothing at the offering price. This is a structural feature of the IPO market, not a random outcome.
Stage Three: First Day of Trading
When the stock opens for trading on an exchange, the IPO price has already been set. What happens on the first day is determined by the relationship between that price and what the broader market — including retail investors who had no access to the offering — believes the company is worth.
The famous first-day pop — when IPO stocks open significantly above their offering price — is a direct result of the book building process. Banks systematically underprice IPOs relative to true market value in order to ensure the institutional clients who receive allocations make an immediate profit. This generates goodwill and deal flow for future offerings.
The average first-day return for IPOs historically runs between 10% and 20%, though this varies enormously by market environment. In the 2020-2021 IPO boom, many tech IPOs doubled or tripled on the first day. In cold markets, some IPOs open below their offering price.
From the company's perspective, the first-day pop represents money left on the table. If a company priced its IPO at $20 and the stock opens at $30, the company raised $20 per share when the market was willing to pay $30. That $10 per share went to institutional clients who flipped their allocations, not to the company.
Stage Four: The Lockup Period
After the IPO, company insiders — executives, employees, early investors, and venture capital firms — are subject to a lockup agreement that prevents them from selling their shares for a defined period, typically 180 days from the IPO date.
The lockup serves a stabilizing function: if every insider could immediately sell into the IPO excitement, the flood of supply would likely crash the stock price.
When the lockup expires, however, the dynamic reverses. The supply of shares available to trade increases dramatically as insiders who have been waiting months to monetize their holdings begin selling. Academic research consistently shows that IPO stocks tend to underperform in the weeks around lockup expiration as this additional supply meets the market.
Tracking lockup expiration dates for IPO stocks you own is one of the most practically useful things an investor can do. The selling pressure around expiration is not guaranteed — if the stock has fallen significantly from the IPO price, insiders may hold rather than sell at a loss — but it is a reliable enough pattern to warrant caution.
IPO Performance: What the Data Shows
The long-run performance data on IPOs is sobering, particularly for retail investors who buy in the open market on the first trading day.
Research by Jay Ritter at the University of Florida — one of the leading academic experts on IPOs — shows that over 3-5 year periods, the average IPO significantly underperforms comparable public companies. His work found that IPOs issued from 1980 through the 2010s delivered annualized returns roughly 3-4 percentage points below matched non-IPO companies over the following five years.
Several mechanisms explain this underperformance:
The timing bias: Companies go public when valuations are high and investor appetite is strong. They are choosing to sell to the public at the moment the price they can get is most favorable — which is often when growth expectations are highest and therefore most likely to disappoint.
The lock-in of hype: IPO prices often reflect peak optimism. The institutional investors who built the book are optimistic, the management team presenting the roadshow is optimistic, and the market conditions are favorable. This collective enthusiasm tends to overprice growth expectations.
The information asymmetry: The company's insiders know far more than new public market investors about the business's true trajectory. They chose to sell at this moment for a reason.
Notable recent examples illustrate the range of outcomes. Arm Holdings (ARM), which went public in September 2023 at $51 per share, subsequently surged dramatically amid the AI semiconductor frenzy, demonstrating that strong execution can override the historical average. Reddit (RDDT), which IPO'd in March 2024 at $34 per share, also performed well initially before volatility, though longer-term performance remained uncertain at the time of its listing. In contrast, many 2021-era SaaS IPOs — Rivian (RIVN), Robinhood (HOOD), and others — fell 70-90% from their IPO prices within 18 months as interest rates rose and growth multiples compressed.
IPO Alternatives: Direct Listings, SPACs, and Shelf Registrations
The traditional underwritten IPO is not the only path to public markets. Over the past decade, several alternatives have gained prominence.
| Feature | Traditional IPO | Direct Listing | SPAC |
|---|---|---|---|
| New capital raised? | Yes | No | Yes (from SPAC trust) |
| Underwriting fees | 3–7% of proceeds | Minimal | None to company |
| Lockup period | 180 days typically | None | Varies |
| Price discovery | Bookbuild (day before) | Market opens trading | Merger negotiation |
| Institutional allocation | Yes, bank-controlled | No pre-allocation | N/A |
| Retail access at IPO price | Extremely limited | Open market day one | Via SPAC shares/warrants |
| Notable examples | ARM, RDDT, most IPOs | Spotify, Coinbase | DraftKings, Lucid |
| Typical use case | Capital need + brand | Well-known, no capital need | Speculative/growth companies |
Direct listings became attractive to large, well-known private companies that didn't need to raise capital but wanted to provide liquidity to employees and early investors. Spotify's 2018 direct listing was the model. Companies save the underwriting fees (typically 3-7% of IPO proceeds) and avoid the banker-controlled allocation that enriches institutional clients at the company's expense.
SPACs (Special Purpose Acquisition Companies) — blank-check companies that raise capital through their own IPO, then merge with a private company — became enormously popular in 2020-2021, then largely fell out of favor. The structure created genuine misaligned incentives: SPAC sponsors (the promoters) received shares for minimal investment, diluting the capital that operating companies actually received. Academic research on SPAC returns showed severe underperformance on average.
How Retail Investors Can Access IPOs
The honest answer: with limited success at the offering price.
The IPO allocation process is controlled by the underwriting banks, which distribute shares to their institutional clients. Most retail investors have no practical access to shares at the offering price unless they use a brokerage that has specifically negotiated retail allocation programs.
Some brokerages have attempted to change this:
- Robinhood offered retail IPO access for select deals through its IPO Access program
- Fidelity and TD Ameritrade have IPO participation programs with varying allocation availability
- Interactive Brokers has an IPO subscription platform with broader access
Even through these programs, allocations for popular deals tend to be small and may not be available to all account types. For most retail investors, IPO participation means buying in the secondary market after trading begins — which means paying at or above the first-day opening price, not the offering price.
Given the research on long-term IPO underperformance, this is not necessarily a disadvantage. Waiting 6-12 months after an IPO to let the lockup expiration pressure pass, the initial hype fade, and the true business trajectory become visible often produces better entry opportunities than buying at the IPO price.
What to Actually Read in an S-1
If you are considering buying an IPO stock, reading the S-1 is time well spent. But knowing where to focus matters:
Read the Risk Factors section seriously: This is not boilerplate. Companies are legally required to disclose material risks, and the specific risks they call out tell you what management is actually worried about. A long, detailed risk factor about customer concentration risk is a real signal.
Read the Use of Proceeds: Where is the money going? If a substantial portion is going to redeem early investor shares (a "secondary offering" embedded in the IPO), the company is not raising capital — it is providing a liquidity event for insiders.
Look at the cap table: How much dilution is there from employee option pools? What is the post-IPO ownership of founders, VCs, and management? Heavy insider ownership after the IPO is typically positive; a cap table showing that VCs are selling large amounts in the offering warrants scrutiny.
Read Management's Discussion and Analysis (MD&A): This section explains the financial results in plain language. Pay attention to what management emphasizes and — more importantly — what they de-emphasize or bury in footnotes.
The Bottom Line
IPOs are among the most exciting events in financial markets, but the excitement tends to work against disciplined investors. The process is designed primarily to benefit the underwriting banks and their institutional clients. First-day pops are manufactured through deliberate underpricing. Long-term performance data suggests the average IPO underperforms comparable public companies over 3-5 year periods.
This does not mean IPOs are never good investments. Arm Holdings, Shopify (SHOP), and Airbnb (ABNB) are examples of IPOs that delivered strong long-run returns for investors who bought early and held. But identifying these ahead of time requires careful analysis of the business, skepticism about IPO-day hype, and attention to the lockup calendar.
If you are watching IPO stocks closely, the first weeks of trading are among the most volatile and information-rich periods in a new public company's life. Set price alerts on the stocks you are tracking — the most actionable entry points often appear during the post-lockup selling pressure or when the initial enthusiasm fades and the stock finds its true equilibrium. Stock Alarm Pro lets you set alerts at specific price levels or for unusual volume spikes, so you can act when conditions actually align with your thesis rather than chasing momentum on opening day.
