Trading IPOs: What Retail Traders Need to Know

IPOs are sexy. They're hyped up. They're talked about on CNBC. They give the illusion of "getting in early." And every few years, one comes along that shoots up 100%+ in a day - and makes every retail trader feel like they're missing the boat. But beneath the headlines and opening-day fireworks, most IPOs are a lot more complicated than they seem. And if you don't understand how they work - from pricing to lock-up expirations to long-term performance - you're probably trading blind. Let's fix that.

What Is an IPO - and How Is It Priced?

An IPO (Initial Public Offering) is when a private company sells shares to the public for the first time. But contrary to what many retail traders think, you're not getting in "early" - you're getting in last. Here's how it works:

• The company hires investment banks (underwriters) to manage the IPO.
• The banks set a price through a process called book building, where they gauge demand from institutional investors.
• The IPO price is usually set slightly below market demand to create a "pop" on day one.

And that's key: the IPO price is not set by the free market. It is negotiated behind closed doors with big funds, hedge funds, and insiders getting first dibs. By the time it hits your screen, they are already in.

The First Day of Trading: Pop or Flop

Once the IPO goes live, it starts trading on an exchange like any other stock. But here's the catch: retail traders almost never get the IPO price. You get the opening price, which could be 20%, 50%, or even 100% higher than the IPO price. Here are some recent examples:

• Airbnb (ABNB): IPO priced at $68, opened at $146.
• Rivian (RIVN): IPO priced at $78, opened at $106.
• Facebook (META): IPO priced at $38, opened near $42 - and then crashed 50% over the next few months.

That initial spike is often driven by supply/demand imbalance, not fundamentals. And more often than not, it fades once reality sets in.

What Happens in the First Year

1. The Hype Phase (Weeks 1-6): This is where the media is all over it. Social sentiment is strong, volatility is high, and everyone wants a piece. But most companies don't release earnings yet. There's no guidance and no institutional research. You are trading on vibes.
2. Lock-Up Expiration (~6 Months In): This is one of the most important events for IPO traders to watch. After ~180 days, insiders and early investors are finally allowed to sell their shares. That can unleash massive selling pressure - especially if the stock is trading above their cost basis. If you're holding an IPO stock into its lock-up expiration and don't know when it is, you are asking for trouble.
3. The First Earnings Reports: Now we get signal through the noise. Investors finally get a look at margins, user growth, revenue trends, and forward guidance. The market adjusts expectations - and often violently.
4. The Base-Building Phase: After the hype fades and reality kicks in, the stock starts to trade like a normal stock: technical patterns form, volume stabilizes, and support and resistance levels emerge. This is usually when smart traders start paying attention again.

The Long-Term Performance of IPOs

Here's the inconvenient truth: most IPOs underperform over the next 1-3 years. According to multiple studies, a large portion of IPOs lag the broader market once the first-year hype wears off. Many even trade below their IPO price years later. Why?

• Companies often go public at peak valuation.
• Management teams use the IPO as a liquidity event, not a growth inflection point.
• Retail sentiment fades, and institutions don't step in until the fundamentals improve.

But there are exceptions - like Facebook, which struggled for a year before becoming one of the best performers of the 2010s. That's why you can't just blindly buy IPOs; you need a framework.

Common IPO Trading Mistakes

Let's go over some rookie errors that catch traders off guard:

• Chasing the Day-One Pop: You're buying into the hype when supply is scarce. Risk/reward is terrible unless you're scalping.
• Ignoring Lock-Up Dates: Insiders unloading shares is rarely bullish. Know the dates and plan your exits.
• Thinking You're Getting in Early: You're not. The "smart money" got in during the private rounds.
• Confusing Brand Power with Investment Potential: Just because you use the app doesn't mean the stock will perform. Look at the numbers.

Smarter Ways to Trade IPOs

Want to trade IPOs with less risk and more edge? Here are some smarter strategies:

• Wait for Technical Setups: Don't trade on day one. Let a base form. Watch for breakout patterns with volume confirmation.
• Track Lock-Up Expirations and Insider Activity: Use them as events to trade around, not through.
• Watch Institutional Accumulation: Look at 13F filings and fund ownership. Smart money often waits before buying in size.
• Use IPO ETFs or Baskets: Reduce single-stock risk by trading IPO ETFs like $IPO or $FPX.
• Focus on the Business, Not the Buzz: Dig into the fundamentals. If the company is bleeding cash and burning runway, don't fall for the hype.

Final Thoughts Trading IPOs isn't about getting rich on day one. That's a lottery ticket mindset - and Wall Street is the house. If you're going to trade IPOs, treat them like any other stock: wait for setups, manage your risk, and understand the game you're playing. Because in the world of IPOs, hype is high, liquidity is thin, and reality always shows up eventually.