IPO Reality vs. the Headlines

The First-Day “Pop” — and Who Actually Gets It

You’ve probably seen the headlines when a hot company goes public and its stock jumps on the first day.

And those numbers can be pretty compelling. Across more than 9,000 IPOs since 1980, the average increase from the offering price to the first-day closing price has been 19%.¹

That can make it feel like there’s a small window of opportunity you need to jump on before you miss out.

But there’s an important piece of the story that often gets overlooked.

There is a difference between buying shares at the IPO offering price and buying them once the stock actually begins trading on the public market.

The IPO offering price is established before trading begins, and access to those shares is typically limited, with the majority allocated to large institutional investors.²

Most individual investors aren’t buying at that initial offering price. Instead, they’re buying once the stock begins publicly trading—which means that big first move everyone is talking about may have already happened, and the price they actually pay could be higher than the IPO price.

That distinction matters.

When you hear about the impressive “first-day return” of an IPO, that return is generally being calculated from the IPO offering price—not necessarily the price an individual investor could realistically pay.

And while we certainly hear about the IPOs that take off, the results across the broader IPO market are much more mixed.³

What Happens a Few Months Later?

There’s another piece of IPO investing that doesn’t get nearly as much attention: the lockup period.

Early investors, founders, and company insiders are typically restricted from selling their shares for the first 90 to 180 days after an IPO.⁴

Once that lockup period expires, a potentially large number of shares can become available for sale at the same time.

Many of those early investors and employees took significant risks during the company’s startup years and may be motivated to finally cash out some of their holdings. Research shows that the resulting increase in the supply of shares can consistently create downward pressure on the stock price.⁵

That’s an important consideration for anyone thinking about buying an IPO—not just on day one, but in the months that follow.

The Longer-Term Numbers Tell a Different Story

This is where I think the numbers get especially interesting.

When you look beyond the excitement of opening day, the longer-term performance of IPOs tells a very different story.

Roughly 56% of IPOs purchased at the offer price lost money after three years. After five years, 
that number increases to 57%.

And remember, most individual investors aren’t buying at the offer price.

When shares were purchased at the first day’s closing price, 60% lost money after both three 
and five years.⁶

Interestingly, opening-day excitement and long-term results can actually move in opposite directions. The companies receiving the most media attention and investor enthusiasm are often the ones that ultimately deliver the most disappointing results.

Why We Focus on Portfolios, Not Headlines

This is exactly why we don’t build investment strategies around whatever happens to be dominating the headlines.

There will always be a company, investment, or market story getting a tremendous amount of attention. And sometimes it can be really tempting to feel like we need to do something because everyone is talking about it.

But our job is to keep bringing the conversation back to you.

Your goals. Your timeline. Your risk tolerance. And the long-term strategy we’ve built around those things.

That approach may not always be as exciting as chasing the latest IPO or investment headline—and  sometimes good investing can feel a little boring. But boring isn’t necessarily a bad thing when we’re talking about money you’ve spent years building.

We would much rather make thoughtful decisions based on your financial plan than react to whatever happens to be getting the most attention this week.

And as always, if something you see or hear in the news makes you wonder whether it should change what we’re doing with your portfolio, ask me. I’m always happy to talk through it with you.

Learn more about MBCEA membership and read additional business management articles.                               

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Shannon Fowler                                                                
Private Wealth Advisor                                                  
IronBridge Wealth Counsel, LLC 
636-299-8558 Mobile 
Shannon.Fowler@IronBridgeWC.com
IronBridgeWC.com