The IPO process — and what it means for traders

Going public, one risky step at a time

An IPO — initial public offering — is when a private company first lists its shares on a public stock exchange. It is a milestone for the company: founders and early investors can finally sell some of their stake, and the company can raise fresh capital from the public market. For traders watching from the outside, it is the opposite of a milestone — it is the riskiest moment in a stock's life. You have no real chart, no quarterly history under public scrutiny, and a stream of insiders just waiting to sell.

The mechanical steps of a US IPO. First, the company files an S-1 with the SEC, disclosing financials, risks, and the proposed listing. Investment banks — the underwriters — set a price range and run a roadshow, pitching the deal to institutional buyers. On pricing day, usually after the close, the final IPO price is set. The next morning, shares start trading on the exchange. The first trade price is almost always above the IPO price — that's the 'pop' you hear about. Retail traders rarely get IPO-price allocation. They buy at the open, which is often the pop's peak.

Three risks specific to brand-new listings. One: no historical chart. The stock has no support and resistance levels, no moving averages worth respecting, no track record of investor behavior. Two: enormous early volatility. Implied volatility on options if they exist is sky high, and intraday swings of 10-20% are normal for weeks. Three: the lockup expiration. Most IPOs have a 180-day lockup that prevents insiders — founders, employees, pre-IPO investors — from selling. Right around day 180, that supply hits the market all at once. Stocks routinely drop 10-30% around lockup expiration. It is not subtle.

Two IPO alternatives have grown in the past decade. Direct listings — Spotify and Coinbase used this — skip the underwriter pricing process and let existing shareholders sell directly into the market at market-determined prices. There is no traditional lockup, so supply is more orderly but less predictable. SPACs — special purpose acquisition companies — are shell companies that IPO themselves first, then merge with a private business to take it public. SPACs surged then crashed in 2021-2023, leaving most retail SPAC buyers underwater. Both alternatives are still active. Both come with their own quirks.

A pragmatic rule for newcomers. Skip the IPO. Wait two to four quarters. Let the company report a couple of earnings as a public company, let the lockup pass, let analyst coverage settle. The fear of missing the first 100% move is real. The number of IPOs that retraced 70% from their first-week highs is also real. Patience pays here more often than not.

Recap: IPO is a company's first public sale. Underwriters price, then it trades. Early-listing risks are no history, high volatility, and the 180-day lockup. Direct listings and SPACs are alternatives. Patience beats FOMO most of the time.