IPO Reality vs. the Headline Narrative
When IPOs Dominate the Conversation
When a company that most people recognize goes public, suddenly it's everywhere. Media coverage spikes. People start talking about the opportunity, and that conversation itself can become part of the appeal. It feels like a moment—like something worth catching.
There’s a behavioral-finance component to this. Research has found that investors tend to pay more attention to companies receiving significant news coverage. That attention can influence investment decisions even when the underlying fundamentals haven't changed.
In other words, visibility can feel like investment information. But they aren't necessarily the same thing.
IPOs naturally generate significant attention. Companies and their investment banks market the offering to prospective investors, financial media cover anticipated offerings, and investors speculate about what a company might be worth once shares begin trading. Understanding what actually happens during that process can help put the headlines into perspective.
What Actually Happens When a Company Goes Public
Before an IPO begins trading publicly, the company's investment banks typically conduct a roadshow. Executives present the company to institutional investors and other asset managers, while the underwriters assess demand at different price points.
That process, known as book-building, helps determine the IPO's offering price and how shares will be allocated.
A substantial portion of IPO shares is typically allocated to institutional investors before public trading begins. Individual investors may have limited access to shares at the offering price and often participate only after the stock begins trading in the secondary market. That distinction matters. According to University of Florida IPO research, the average first-day return from offering price to closing price has historically been positive. But that return reflects the experience of an investor who received shares at the offering price—not necessarily someone who purchased after public trading began. And not every IPO rises on its first day.
Some IPOs Open Negatively
Some IPOs finish their first trading day below their offering price. Others experience relatively modest price movement.
The IPOs that receive the greatest attention are often those with dramatic first-day moves. That can create a distorted impression of the typical IPO experience. A memorable headline about a stock soaring on its first day doesn't necessarily tell us much about what an investor purchasing the stock afterward will experience.
The Lockup Expiration Reality
Another part of the IPO process happens months later.
Company insiders, employees, and early investors are commonly subject to a lockup period that restricts their ability to sell shares for a specified period after the IPO, often 90 to 180 days. When that restriction expires, those shareholders may become eligible to sell their shares. The resulting increase in shares available for sale can contribute to increased trading activity and, in some circumstances, selling pressure.
There’s another important change in today's IPO market: companies often remain private longer than they did decades ago. University of Florida data illustrates that shift. In 1980, the median IPO company had approximately $16 million in revenue—about $64 million when adjusted for inflation. By 2024, median revenue had reached approximately $218 million. That means a significant portion of a company's early growth may occur before public-market investors have an opportunity to own its shares.
This doesn't mean an IPO is necessarily a poor investment. It means investors buying after an IPO may be investing in the company at a very different stage of its development than its founders, employees, venture investors, or other early shareholders did.
What the Data Shows About Long-Term IPO Returns
The excitement surrounding an IPO's first trading day doesn't necessarily tell us what will happen over the following several years. Historical research has found that IPO performance varies considerably over longer periods, with many newly public companies subsequently producing negative returns. The important distinction is between the company's story at the time of its IPO and the investment results that follow. Media attention, investor enthusiasm, and a strong opening day do not guarantee strong long-term investment performance.
The Gap Between a Great Company and a Well-Priced Investment
A company can be genuinely innovative, well-managed, and capable of reshaping its industry and still be priced in a way that may leave limited upside for a new investor. That distinction can get lost in IPO conversations. Believing in a business and having an investment thesis at a particular price are two different things.
A stock's price reflects expectations about the company's future. When expectations are particularly high, investors may already be paying for substantial future growth. Someone purchasing after a significant opening-day increase should therefore consider not only whether the company is likely to grow, but how much growth may already be reflected in its current valuation.
Behavioral biases can complicate that analysis. Familiarity bias, for example, can cause investors to favor companies or investments they recognize. Someone who loves a company's products or believes strongly in its mission may naturally feel more comfortable owning its stock. But familiarity with a company doesn't necessarily tell us whether its stock is appropriately valued or whether it belongs in a particular portfolio.
What Questions to Consider Before Acting on IPO Excitement
No checklist replaces an analysis of your individual circumstances. But there are questions worth considering before interest in a company becomes an investment position.
- What percentage of my overall portfolio would this represent?
Position size matters. Consider how an individual stock would affect the diversification and overall risk of the portfolio. - Am I investing in the business or reacting to the narrative?
A compelling story may attract attention, but an investment decision should also consider the company's business model, financial condition, valuation, risks, and prospects. - What assumptions am I making about the company's future?
What would have to happen for the investment thesis to work? Consider whether those assumptions are reasonable and what could happen if they don't materialize. - Would I still want to own this company several years from now?
Looking beyond the first few days or months can help shift the focus from short-term market excitement to the underlying investment thesis. - What are the alternatives?
Consider how this investment compares with other opportunities and how it fits within your overall financial strategy, risk tolerance, time horizon, and existing holdings.
These considerations won't tell us what an IPO will do next. They can, however, provide a framework for evaluating the decision beyond the headlines.
Where This Conversation Adds Value
Following a company is entirely reasonable. Reading about what it does, watching how management handles the transition to being publicly traded, and staying informed can all be useful. Buying shares primarily because of media coverage or opening-day momentum is a different decision.
A financial advisor can help put an individual investment opportunity into the context of a broader financial plan—including your goals, time horizon, risk tolerance, diversification, and existing portfolio. At Rainier Wealth Planning, our role isn't to predict which newly public company will become the next market success story. It's to help clients evaluate investment decisions within the context of the strategy they've already built. Sometimes that means asking questions that are harder to hear when a particular investment is dominating the headlines.
If you have questions about your approach to IPOs or whether a new investment opportunity fits into your overall financial strategy, we'd welcome the conversation.
Frequently Asked Questions
What Is an IPO Lockup Period, and Why Does It Matter?
A lockup period temporarily restricts certain company insiders, employees, and early investors from selling their shares following an IPO. These periods commonly last 90 to 180 days. When the lockup expires, those shareholders become eligible to sell. An increase in shares available for sale may contribute to additional trading activity or volatility, although an expiring lockup does not necessarily mean insiders will sell their shares or that the stock price will decline.
Do Individual Investors Get IPO Shares at the Offering Price?
Sometimes, but access may be limited. IPO shares are generally allocated before public trading begins, with a substantial portion commonly going to institutional investors. Some individual investors may receive allocations through participating brokerage firms, while others may only have the opportunity to purchase shares once public trading begins. The distinction is important because the price available once a stock begins trading may differ significantly from the IPO offering price.
How Have IPOs Historically Performed Over the Long Term?
Long-term IPO performance has varied considerably. Research has found that many IPOs experience disappointing or negative returns in the years following their public debut. Results also depend on factors such as the period studied, the price at which an investor purchased shares, and how returns are measured. The broader takeaway is that a strong first trading day or significant investor enthusiasm does not necessarily translate into strong long-term performance.
Why Do Companies Go Public?
Companies may pursue an IPO for several reasons. Going public can raise capital, provide liquidity opportunities for existing shareholders, create publicly traded shares that can be used for future transactions or employee compensation, and increase a company's visibility. Those benefits to the company and its existing shareholders don't necessarily make the stock a good or bad investment for a new shareholder. They're simply part of the context investors should understand when evaluating the opportunity.
How Is the IPO Offering Price Determined?
Investment banks hired by the company typically conduct a book-building process before the IPO. They present the offering to prospective institutional investors and assess demand at various price levels. The company and its underwriters use that information, along with other factors, to determine the offering price and allocation of shares. Once the stock begins public trading, market supply and demand determine the price available to other investors.
Why Does Media Coverage of IPOs Matter to My Decision-Making?
Behavioral-finance research suggests that investor attention can influence investment decisions. A company receiving extensive news coverage may naturally attract more interest simply because investors are hearing about it more often. That doesn't mean the company is a poor investment. It means media visibility and investment merit should be evaluated separately. What dominates the headlines and what fits your financial strategy aren't necessarily the same thing.
Important Disclosure: This material is provided for educational and informational purposes only and should not be construed as individualized investment advice or a recommendation to buy or sell any security. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Individual circumstances vary, and investment decisions should be considered in light of your specific objectives, risk tolerance, time horizon, and financial circumstances.
Barber, Brad M. & Terrance Odean. “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors.” Review of Financial Studies, Vol. 21, No. 2, 2008, pp. 785–818.
Ritter, Jay R. “The Long-Run Performance of Initial Public Offerings.” Journal of Finance, Vol. 46, No. 1, March 1991, pp. 3–27.
Yi, Jong-Hwan. “Pre-offering earnings and the long-run performance of IPOs.” International Review of Financial Analysis, Vol. 10, No. 1, 2001, pp. 53–67.