What Investors Should Know About IPOs

The Time Machine Temptation

What would you do if you had a time machine? Go back and see the dinosaurs? Warn the Titanic? Or maybe just make sure your parents met at the high school dance?

Most people I talk to give some version of the same answer: “I’d tell myself to buy Apple stock back in 1995.” That dream of getting in on the ground floor before a company takes off is powerful.

Right now, as a private wealth manager, I’m getting calls every day from investors who feel that same pull. They hear the bullish buzz around upcoming high-profile IPOs like SpaceX and they’re tempted to jump in—even though some of these names have already seen big moves in private markets. The fear of missing out is real. But emotion is a terrible investment advisor.

What an IPO Really Is

An IPO, or initial public offering, is simply the moment a private company sells shares of its stock to the public for the first time. It is the fastest way for a business to raise serious capital. For investors, it feels like the only chance to climb aboard the rocket ship before liftoff. Yet that excitement comes with real risks.

With several major IPOs on the horizon, this feels like the perfect time to step back and look at how the process actually works—so you can make decisions with your head, not your heart.

How the IPO Process Unfolds

The first step is hiring an investment bank to act as the underwriter. The underwriter buys all the shares from the company at a set price and then resells them to the public at a higher price to make a profit. Because this carries risk—if the shares don’t sell—the underwriter often brings in other banks to form an underwriting syndicate and share the load.

Prospectus and Offer Price

Next comes the prospectus—a long, detailed document that can cure insomnia but is packed with critical information. It tells investors exactly what the company does, its financial health, how it is managed, and how it plans to create value. The company and underwriters then set the offer price based on expected demand, comparable companies, capital needs, and future cash flows.

Get the price too high and shares sit unsold. Get it too low and the company leaves money on the table.

The Big Day

Then the roadshow begins—a whirlwind of marketing, press, and investor meetings designed to build excitement. The underwriters may tweak the prospectus, adjust the price, or even shift the date, all while staying within SEC rules. Finally, the big moment arrives. Shares list on an exchange like the NYSE, and trading begins. Most of the shares go to institutional investors rather than individual retail buyers.  Ironically, the less attractive an IPO is priced, the more retail investors can grab IPO shares at the initial offering price.

The Real Advantages

The pros are easy to see. Some IPOs turn into superstars, and the share price on day one can look like the cheapest it will ever be. If you believe deeply in the company’s mission, you may even feel good cheering for its success beyond just the potential profit. For believers in companies like the ones making headlines right now, that excitement is understandable.

But the Risks Are Serious

Here is where many investors lose perspective. We cannot travel back in time. We do not know which companies will become the next Apple and which will quietly fade away. For every big winner, there are dozens of IPOs that never live up to the hype. You are essentially placing a big bet on the unknown.

Volatility Can Test Your Nerves

Even if a company does well over the long term after it IPOs, they are extremely volatility and many investors go through serious pain before reaping big rewards.  Unfortuntaly, many people do not have the patience and hold on.  News is not always positive and views change and people lose heart. 

The initial rush of buyers can push prices up fast. Then reality sets in. Facebook is a classic example: after a hot debut, its stock fell sharply and took more than two years to climb back above the offer price. Many investors who bought on emotion watched their gains disappear.

The Lock-Up Period Drop

Company insiders—founders, employees, and early investors—are usually barred from selling their shares for three to twenty-four months. When that lock-up expires, a wave of selling can hit the market and drive the price lower. This pattern repeats often enough that smart investors plan for it.

Taking the Long-Term View

IPOs can be exciting, but they should never be impulsive. Most come and go quietly. The ones that make headlines tempt us with stories of instant riches. Yet the data shows that patience and a clear strategy almost always beat FOMO. Keep in mind, too, that you may eventually own shares of these companies through the diversified funds already in your portfolio.

As a wealth manager, my job is to help you cut through the noise and focus on what fits each investor’s overall plan. When I see so many people clamoring for IPOs or more speculative stocks, my initial instinct is the get my pencil out and sharpen it, because many times, those investments turn sour.  I become a risk manager first then size accordingly. 

Our clients have been invested in private funds of which many already own SpaceX. This position has grown and many cases above 20% of the portfolio. These investments will most certainly make a handsome profit once these company goes public.  If you buy it in the aftermarket, you are not necessarily guaranteed such rewards. 

If you are not deeply familiar with private investments or the mechanics of IPOs, or if you want access to opportunities that are generally unavailable to do-it-yourself investors, I encourage you to reach out to a qualified advisor to discuss how these ideas align with your long-term goals and to help you strategize effectively.

I want to hear your thoughts

What are your thoughts on the current buzz surrounding IPOs? Drop a comment below—I read every one and the conversation helps all of us stay grounded. Let’s keep investing with clear eyes and steady hands.