Why You Shouldn't Chase an IPO

The banks that run an IPO, called underwriters, set the price and decide who gets shares first. They give most of the shares to their biggest clients before regular people can place an order. The SEC's own investor bulletin on IPOs (opens in new tab) says the same thing: underwriters typically hand most shares to mutual funds, hedge funds, pension funds, insurance companies, and wealthy individuals. Most people never get a shot at buying at the actual IPO price.

That gap between the IPO price and where the stock opens for regular trading is called underpricing, and it shows up in the numbers every year. According to Jay Ritter's University of Florida IPO database (opens in new tab), updated July 2026, the average U.S. IPO jumped 19.0% on its first day of trading across 9,343 deals from 1980 through 2025. In 2025 alone, the average first-day jump was 29.3%. That gain goes to whoever already held shares at the IPO price, mostly the big investors above. If you buy after the stock opens, you're buying after that jump already happened, not before it.

Underwriters can also prop up the price for the first few days by buying shares themselves, which keeps it from falling too far below the IPO price early on. The SEC says it plainly: "Once this support ends, the stock price may decline significantly below the offering price." A strong first week doesn't mean the market has actually figured out what the company is worth.

Most companies that go public count as "emerging growth companies" under SEC rules. That basically means the company makes under $1 billion a year, and it keeps this status for up to five years after the IPO. The status comes with real breaks on disclosure: these companies only have to show two years of audited financial statements instead of three, and for up to two years, no outside auditor has to check their internal financial controls.

That doesn't mean the numbers in the prospectus (the document a company files to explain the IPO) are wrong. It means there's less outside checking behind them than behind a company that's filed reports for years. It's also worth remembering who wrote the prospectus: the company and its underwriters, to sell the deal. The standardized reports that come later, called 10-Qs and 10-Ks, come with auditor sign-offs and executive certifications. That's a different bar entirely.

That thinner record runs into a second problem on IPO day: most of the company's shares can't even be sold yet.

On IPO day, the only shares actually trading are the ones sold in the offering itself. Founders, employees, and early investors usually sign a lockup agreement, a promise not to sell their own shares for a set period, typically 180 days per the SEC's bulletin. Until that period ends, all of that ownership just sits there, outside the public market. The SEC has a name for this waiting pile of shares: the "market overhang."

What happens when the lockup expires matters, because a lot of shares can become sellable on the very same day. The SEC's own guidance is blunt about the risk: "when lock-up agreements expire, the share price may decline significantly if a large number of shares become available for sale all at once." Early investors and employees often see the IPO as their first real chance to cash out, and the lockup expiration is when that chance finally arrives.

This isn't just a warning in a government pamphlet. Academic research backs it up. A study of 1,948 share lockup agreements (Field, L.C. and Hanka, G. (2001), "The Expiration of IPO Share Lockups," The Journal of Finance, 56(2): 471-500 (opens in new tab)) found that once the lockup expired, trading volume rose by a permanent 40%, and the stock's price fell by a statistically significant 1.5% on average over the three days around the expiration date. The effect was even bigger at venture-capital-backed companies, where the study found VCs sold more aggressively than executives and other shareholders once they were free to.

That's an average, not a rule for every stock. Some companies soak up the new supply without much of a price hit, especially when demand is strong. But it's a real, documented date on the calendar, and waiting past it costs you almost nothing.

Ritter's data also tracks what happens after the first-day jump fades. Across 9,253 U.S. IPOs from 1980 through 2024, the stocks trailed the overall market by an average of 20.5 percentage points over the next three years. That works out to about 5.5 percentage points of lost ground per year, since the average company was held for 2.8 years in this data. Compared instead to similar public companies of the same size and value, not the whole market, the gap shrinks to 8.9 points. Still behind, just less behind.

The averages hide a wide gap between winners and losers. Smaller, unprofitable IPOs, the kind that get the most hype, fall behind the most: companies making under $100 million in sales at the time of their IPO trailed the market by 34.3 percentage points over three years, and companies that were losing money at the time of their IPO trailed by 30.7 points. Those are exactly the stories people get excited about.

To be fair, it isn't true across the board. Large, already profitable companies (those with $1 billion or more in sales) landed close to even with similar companies (+0.6%) and only a little behind the whole market (-2.1%). How big and how profitable a company already is predicts the outcome far better than how exciting the IPO looked on day one.

None of this guarantees anything about one specific stock. It's an average across thousands of companies over 45 years, and any single IPO can do much better or much worse. But across that much history, buying the newest, least-tested name at its most expensive moment just hasn't paid off.

Wait past the lockup. The company has to disclose the lockup's end date in the prospectus, usually under a heading called "Shares Eligible for Future Sale." Watch how the stock trades once that supply is actually free to sell, instead of guessing ahead of time.

Wait for at least one or two earnings reports. A quarterly report (called a Form 10-Q) comes with standard disclosure rules and executive sign-offs that the prospectus, written to sell the deal, doesn't have. Two of these reports in a row tell you more about a business than one sales document ever will.

Watch what insiders do once the lockup ends. How much stock insiders actually sell once they're free to, compared to how much they keep, tells you something real: whether the people who know the business best are sticking around at this price.

Check how long the company's disclosure breaks last. "Emerging growth company" status, and the lighter audit and reporting rules that come with it, can last up to five years after the IPO. Know whether you're looking at a company's fully audited numbers or still an easier standard.

None of Narstar's three model portfolios chase a company's first days as a public stock. The Growth portfolio holds companies with a real, lasting edge over their competitors, and that takes years of results to prove. The Income portfolio holds dividend-paying companies picked for their cash flow, and a company can't show a track record of paying dividends on day one. The Speculative portfolio does take on real risk in smaller, less established companies, but that's a different kind of risk than what this article covers: a 180-day lockup and thinner disclosure that both fade once a company has a real track record.

For taxable accounts, Income charges 0.60% a year, Growth charges 1.20%, and Speculative charges 1.60%. Traditional, Roth, Rollover, SEP, and SIMPLE IRA accounts pay a uniform 1.00% a year regardless of model portfolio mix, billed quarterly in arrears. All three carry real risk: stocks fall, companies fail, and dividends are never guaranteed. What's happened before doesn't tell you what will happen next, and Interactive Brokers may charge its own separate brokerage fees on top of what you pay us.

Isn't getting into a hot IPO the whole point, buying in early before everyone else?

Usually not for regular investors. The banks running the IPO hand most of the shares to big investors and wealthy clients before the stock ever opens to the public, and the average U.S. IPO has jumped 19.0% on its first day of trading since 1980 (29.3% in 2025 alone), according to Jay Ritter's University of Florida IPO database. If you buy after the stock opens, you're usually buying after that jump, not before it.

What exactly is a lockup period, and why does it matter to me?

A lockup is a promise, usually lasting 180 days per the SEC's investor bulletin on IPOs, that keeps a company's founders, employees, and early investors from selling their shares right after the IPO. Only the shares sold in the IPO trade at first. When the lockup ends, a lot of extra shares can hit the market at once, and the SEC says the price may drop a lot because of it.

Does an IPO stock always drop after the lockup expires?

No. It's a documented tendency, not a rule for every stock. A study of 1,948 share lockup agreements (Field, L.C. and Hanka, G. (2001), The Journal of Finance, 56(2): 471-500 (opens in new tab)) found a statistically significant average price decline of 1.5% over the three days around the expiration date, along with a permanent 40% jump in trading volume. Some stocks absorb the new supply with little visible impact. The average effect is real; it isn't universal.

So is there ever a good time to buy a newly public stock?

Once it has a real track record: at least one or two quarterly reports as a public company, a look at how the stock traded once the lockup ended, and audited numbers that go beyond the lighter disclosure rules most IPOs get in their first years. That's a company you can judge by its numbers, not its story.