What is Initial Public Offering (IPO)?

The IPO process typically takes 6-12 months and involves selecting investment banks as underwriters, filing a registration statement (S-1) with the SEC, conducting a roadshow to pitch to institutional investors, setting the offering price, and finally trading on an exchange. The lead underwriter allocates shares to institutional investors, with only a small portion typically available to retail investors.

IPO pricing is both art and science. The underwriter sets a price range based on comparable company valuations, then adjusts based on demand during the book-building process. IPOs are typically priced at a discount to estimated fair value (the IPO pop) to ensure a successful debut and reward early investors. The average first-day return for IPOs has historically been 15-20%.

The lock-up period (typically 90-180 days) prevents insiders and pre-IPO investors from selling shares immediately after the IPO. Lock-up expirations often create selling pressure as these holders diversify. Monitoring the lock-up expiration schedule is important for new IPO investors.

Historically, IPOs have underperformed the market over 3-5 year periods, despite strong first-day returns. This IPO underperformance is well-documented in academic research. Companies tend to go public during favorable market conditions (window dressing), and the hype often leads to overvaluation. Waiting 6-12 months after an IPO to invest has historically produced better returns.