What an IPO really is
Who sells, who buys, and why the first-day price is rarely the one that matters.
Who is on the other side
In every trade, someone is selling. In an IPO it's the founders, the early investors and the venture capital funds — precisely the people who know more about that business than anyone.
They choose the timing too. Companies go public when markets are warm and valuations generous, not when they are cold.
That doesn't mean every IPO is a trap. It means you are the less-informed party in a transaction whose timing was chosen by the other side, and that calls for extra care.
The price you see is not the price that was paid
Banks set an offer price and sell the shares to institutional clients. By the time trading opens to the public, the price is often already much higher.
That “first-day pop” gets reported as a success, but it is really money the company never received — value handed to those who got the shares at the offer price.
The small investor almost always buys after the pop, not before it.
The lock-up period
Insiders are usually barred from selling for six months after the listing. When that period expires, a large batch of shares can hit the market all at once.
That's why many IPOs see a visible drop around month six, with no bad news about the business at all. It is simply new supply colliding with the same demand.
If you want to own a newly listed company, waiting a few quarters gets you more data and often a better price.
Key terms in this lesson
- IPO
- Initial public offering — the first time a company's shares are sold to the wider investing public.
- Lock-up period
- The time after a listing during which insiders cannot sell their shares.
- Underwriter
- The bank that sets the offer price and sells the first shares.
Quick check
Why do many IPOs fall around six months after listing, even without any bad news?
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