From SpaceX to Anthropic to the smart-ring maker Oura, some of the world's most talked-about companies are heading, or being tipped, for the stock market. Every time a big name "goes public", headlines celebrate the debut and the first-day surge. But what actually is an IPO, why do companies do it, why do investors chase them, and, crucially, how do they really perform over time?
This is a guide to initial public offerings: the excitement, the mechanics, and the honest, data-backed reality. It's educational, not investment advice. If it helps you understand the market, you can explore US-listed stocks and ETFs from just $1 with zero commission on the Nemo.money app.
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What Is an IPO?
IPO stands for "initial public offering". It's the moment a private company sells shares to the public for the first time and lists them on a stock exchange (like the Nasdaq or New York Stock Exchange).
- 🔓 From private to public. Before an IPO, a company's shares are held privately, by founders, employees and early investors like venture-capital funds. An IPO opens ownership up to everyone, letting ordinary investors buy in.
- 💵 Raising money, and cashing out. An IPO does two things at once: it can raise fresh capital for the company (to fund growth), and it lets early investors and employees sell some of their shares, turning years of paper gains into real money.
- 📋 A big, regulated process. Going public is a major undertaking. The company files detailed financials (a document called an "S-1" or prospectus), hires investment banks to manage the sale, sets a price with big institutional investors during a "roadshow", and then, finally, starts trading.
Why Companies Go Public
Companies choose to IPO for several reasons, not just to raise cash:
- 🚀 Fuel for growth. A public listing can raise large sums to invest in expansion, research, hiring or paying down debt.
- 🏦 An "exit" for early backers. Venture-capital and early investors put money in years earlier; an IPO is one of the main ways they finally realise those gains. (This is a key motivation, and one worth remembering, as we'll see.)
- 🌟 Prestige and currency. Being public raises a company's profile, and gives it publicly traded shares it can use to attract talent (via stock options) or acquire other companies.
- 👀 The trade-offs. Public companies face intense scrutiny, quarterly earnings pressure, and the cost and disclosure of being listed. It's why many now stay private for longer (more on that below).
Why Investors Are Drawn to IPOs
For investors, IPOs carry a special allure, part opportunity, part psychology:
- 🌱 Getting in "early". The dream is to buy a future giant near the start of its public life and ride the growth. Everyone wishes they'd bought the great tech names on day one.
- 🎢 The "first-day pop". IPOs are famous for jumping on their first day of trading. Historically, the average first-day gain across US IPOs has been roughly 18-19% (and around 17.5% over 2001-2023), with technology and biotech debuts often popping even more. That excitement is a big draw.
- 📣 Hype and FOMO. Media coverage, buzz and the fear of missing out all pull investors toward high-profile debuts, which can push prices to lofty levels quickly.
Here's the crucial catch, though: that famous first-day pop mostly benefits big institutional investors who get shares at the lower "offer price". Ordinary investors usually can only buy once trading starts, after the pop, at the higher market price.
The Honest Reality: How IPOs Actually Perform
This is where the data delivers a sobering, and genuinely useful, message. Despite the exciting debuts, IPOs, on average, tend to underperform the wider market over the following years.
- 📉 Long-run underperformance is well documented. The foundational research here, by finance professor Jay Ritter, found that IPOs from 1975-84 returned about 34.5% over their first three years, versus about 61.9% for comparable established companies, a large gap. Updated studies continue to show IPOs underperforming similar stocks by roughly a couple of percent per year over the five years after listing.
- 💸 Most individual IPOs disappoint. Research has found that more than half of IPOs lose money over their first three to five years. The dazzling winners grab the headlines; the many that fade rarely get a follow-up story.
- 🔒 Watch the "lock-up". Early investors and employees are usually barred from selling for a period after the IPO (often 90-180 days). When that lock-up expires, a wave of selling can hit the share price, one reason IPOs often weaken around five to six months after listing.
- 🧾 Profits matter. The underperformance is worst among unprofitable, small, high-growth companies bought after the first-day pop. Companies that are already profitable, with real sales, have tended to do better. Quality and price still matter.
None of this means every IPO is bad, some become spectacular long-term investments. It means the average IPO, bought the way ordinary investors buy it (after the pop), has historically been a tougher bet than a simple market index fund.
Tech IPOs vs the Rest
Technology IPOs deserve a special mention, because they amplify the whole pattern:
- ⚡ Bigger pops, bigger swings. Because tech (and biotech) companies often have high growth potential but unproven profits, their IPOs tend to see larger first-day pops, and more volatility, than non-tech debuts. They attract the most hype.
- 🎭 An "exaggerated version". Studies describe high-tech IPOs as an exaggerated version of the general rule: underpriced at the offer (hence the pop), but prone to underperform over the longer term, especially the unprofitable ones.
- 🌗 Boom and bust matters. Tech IPOs cluster in "hot" markets, when sentiment is high, and those bought at the peak of the excitement have tended to fare worst. The best-performing tech IPOs, by contrast, are often those with strong, established sales at listing.
The lesson isn't "avoid tech IPOs", it's that the bigger the hype and the pop, the more important it is to look hard at the actual business and price.
How IPOs Have Changed Over Time
The IPO landscape today looks quite different from decades past, in ways that matter for investors:
- ⏳ Companies stay private far longer. Thanks to abundant private funding (from venture capital and big private investors), many companies now delay going public for years. They list later, larger and more mature than the small, young firms that used to IPO.
- 📈 More growth captured privately. A side effect: a lot of a company's fastest growth can happen while it's still private, before ordinary investors can access it. By IPO, some of the biggest gains may already be behind it. This is a real shift from earlier eras, think of hugely valuable private companies like OpenAI, which has grown enormously while still private and not yet listed.
- 🏦 Mega-IPOs and new routes. Recent years have seen enormous, headline-grabbing listings, and alternative routes to going public (such as direct listings and, at times, "SPACs"/blank-cheque companies). The scale and variety of going public have grown.
- 🌍 A double-edged democratization. More people can now access shares (including via apps and fractional investing), which is genuinely positive. But the data on long-term IPO performance is exactly why diversification, rather than chasing every hot debut, matters so much.
The Honest Risks of Buying IPOs
- ⚠️ You can't buy at the IPO price. Ordinary investors typically buy after the first-day pop, at a higher price, missing the very gain that makes headlines.
- ⚠️ Long-run underperformance. On average, and especially for unprofitable names bought after the pop, IPOs have historically lagged the broader market.
- ⚠️ Lock-up selling pressure. Share prices often come under pressure months later when insiders are first allowed to sell.
- ⚠️ Hype over fundamentals. Excitement and FOMO can push debut prices well above what the business justifies. A great story is not a great price.
- ⚠️ Limited track record. Newly public companies have little public history, less data to judge them by, and often sky-high expectations baked in.
The takeaway: IPOs are exciting and occasionally life-changing, but the honest, data-backed reality is that, for most people buying the usual way, they've been a harder path to profit than patient, diversified investing.
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Frequently Asked Questions (FAQs)
What is an IPO in simple terms?
An IPO (initial public offering) is when a private company sells shares to the public for the first time and lists them on a stock exchange. It lets the company raise money to grow, and lets early investors and employees sell some of their shares. After the IPO, anyone can buy and sell the company's shares on the market. Going public is a major, heavily regulated process involving detailed financial disclosures and investment banks.
Why do companies do an IPO?
Companies go public mainly to raise capital for growth, and to give early investors (like venture-capital funds) and employees a way to sell shares and realise gains, often called an "exit". An IPO also raises a company's profile and gives it publicly traded stock it can use to attract talent or make acquisitions. The trade-offs include greater scrutiny, quarterly earnings pressure, and the costs of being a public company.
Do IPOs beat the market?
On average, historically, no. Extensive research (notably by Professor Jay Ritter) has found that IPOs tend to underperform comparable established companies over the three to five years after listing, and that more than half of individual IPOs lose money over that period. There's usually an exciting first-day "pop", but it mostly benefits institutions buying at the offer price, and long-term returns for ordinary buyers have often lagged a simple market index.
What is the IPO "first-day pop"?
The first-day pop is the jump in a stock's price on its first day of public trading, above the price at which the shares were sold to institutional investors (the "offer price"). Historically, the average first-day pop across US IPOs has been roughly 18-19%, with tech and biotech debuts often larger. The catch: ordinary investors usually can't buy at the offer price, they buy after the pop, so they miss that initial gain.
Are tech IPOs riskier than others?
Tech IPOs tend to be an exaggerated version of the general IPO pattern: bigger first-day pops (driven by high growth potential and hype), but also greater volatility and, on average, a tendency to underperform over the longer term, especially unprofitable companies bought at peak excitement. Tech IPOs that already have strong, established sales have tended to do better. The bigger the hype, the more important it is to examine the actual business and valuation.
Final Thoughts: Excitement Is Not a Strategy
IPOs are among the most exciting events in investing. A company that was once private throws open its doors, the media celebrates, the stock often pops, and the dream of "getting in early" on the next giant feels within reach. That excitement is real, and occasionally, for a lucky few names, it's justified spectacularly.
But excitement is not a strategy. The data tells a consistent story: ordinary investors usually can't access the first-day pop, most IPOs underperform the market over the following years, lock-up expiries add pressure, and tech IPOs amplify all of it. Add the modern shift, companies staying private longer and capturing more of their growth before listing, and the case for caution grows stronger still. None of this means never buying an IPO. It means treating each one as a business to research on its fundamentals and price, not a hype train to jump on, and remembering that, for most people, patient, diversified investing has been the more reliable path. Understand the excitement; invest with a clear head.
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Terms and conditions apply. This is not investment advice. Past performance is not indicative of future results. Your capital is at risk. See website for Risk Disclosure. Exinity ME Ltd (https://nemo.money) is regulated by ADGM's Financial Services Regulatory Authority.
