Thinking About Buying an IPO? Read This First.

When a highly anticipated company goes public, it’s easy to get caught up in the excitement.

Financial headlines start flying. Social media is buzzing. Friends are talking about getting in early. And suddenly, buying shares on the first day sounds like a once-in-a-lifetime opportunity.

Sometimes it is.

Sometimes it isn’t.

I’ve personally made money on IPOs. I’ve also watched an IPO drop 30% after I bought it.

If there’s one lesson I’ve learned, it’s that being early doesn’t guarantee being right.

Before you jump into the next big public offering, it helps to understand how IPOs actually work.

How IPOs Work

An Initial Public Offering (IPO) is the process of a private company selling shares to the public for the first time.

Before trading begins, the company works with investment banks known as underwriters to determine an offering price. The underwriters review factors, such as the company’s financial performance, growth prospects, market conditions, and investor demand to help set the IPO price.

While the financial media often reports this “IPO price,” most individual investors don’t have access to buy shares at that price. Those shares are typically allocated to institutional investors and select brokerage clients before trading begins.

Most retail investors (like you and I) purchase IPO shares after they begin trading on the secondary market.

This is where things can get interesting.

A company may have an IPO price of $50 per share, but the stock could open at $65, $80, or even higher once trading begins. At that point, buyers and sellers—not the underwriters—determine the market price.

Avoiding Common IPO Mistakes

One thing that surprises many investors is that IPOs don’t always begin trading at the opening bell. It can take time for exchanges and underwriters to match orders and establish an opening price.

If you’re planning to buy an IPO after trading starts, consider using a limit order (some brokerage firms require a limit order) rather than a market order. A market order buys shares at whatever price is available, while a limit order allows you to set the maximum price you’re willing to pay.

For example, if you’re comfortable paying up to $70 per share, you can enter a limit order at $70. If the stock quickly jumps to $85, your order won’t execute—and that may save you from overpaying.

Another important consideration is position size.

No matter how exciting a company may seem, avoid letting a single stock dominate your portfolio. A common guideline is to limit an individual stock to less than 5-10% of your overall investments.

Keep Expectations Grounded

IPO investing often involves more emotion than analysis. Fear of missing out can cause investors to chase prices higher, only to watch the stock pull back once the excitement fades.

The next big IPO may become the next great success story.

Or it may not.

As the old saying goes, trees don’t grow to the heavens, and neither does every IPO.

That’s why successful investing isn’t about getting in first—it’s about having a plan before you buy.

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