How to Invest in an IPO: A Guide for Individual Investors

Getting access to a company's shares before — or right as — they hit the public market is one of those investing opportunities that sounds simple but comes with real complexity. Whether you're drawn in by the buzz around a high-profile listing or you're methodically building a strategy around early-stage public offerings, understanding how IPO investment actually works is the essential first step.

This guide breaks down the mechanics of investing in an IPO, from the pre-IPO process to post-listing strategy — with a clear-eyed look at the advantages, the risks, and how to make informed decisions rather than chasing headlines.

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What Is an IPO, and Why Does It Matter to Individual Investors?

An Initial Public Offering (IPO) is the process by which a private company offers its shares to the public for the first time, listing them on a stock exchange such as the NYSE or NASDAQ. Before this point, ownership is typically restricted to founders, employees, and private investors like venture capitalists and private equity firms.

For individual investors, an IPO represents a potential entry point into a company's growth story at an early stage of its public life — sometimes before the broader market has fully priced in its potential. That's the appeal. The reality is more nuanced.

Between 2020 and 2021, IPO markets hit a historic peak. Over 1,000 companies went public in the U.S. in 2021 alone, raising more than $300 billion. Many of those early buyers saw significant first-day gains. But by 2022, the market corrected sharply, and a large number of those same IPOs traded well below their offering price within 12 months. Understanding the mechanics protects you from getting swept up in momentum without a plan.

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How the IPO Process Works

Before you can invest, it helps to understand what happens behind the scenes.

The Pre-IPO Phase

Companies preparing for an IPO typically work with investment banks (called underwriters) to structure the offering. During this phase, the company files an S-1 registration statement with the Securities and Exchange Commission (SEC), which contains detailed information about its financials, business model, risk factors, and intended use of proceeds.

The underwriters then conduct a roadshow — a series of presentations to institutional investors like mutual funds, pension funds, and hedge funds — to gauge demand and help set the offering price.

The Pricing and Allocation Phase

Based on roadshow feedback, the underwriting banks set the IPO price — the price at which shares are initially offered. Institutional investors receive the majority of share allocations at this price. Individual retail investors historically had limited access to this stage, though that has been changing.

The First Day of Trading

Once shares begin trading on the exchange, the stock price is determined by open market supply and demand. This is when most individual investors can first buy shares. The difference between the IPO price and the opening trading price is where much of the early volatility occurs.

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How to Buy IPO Shares Before It Goes Public

This is the question most retail investors want answered: how do you actually buy IPO shares before they start trading publicly?

The honest answer is that direct access to IPO pricing has traditionally been restricted to institutional and high-net-worth investors. However, several paths now exist for individual investors.

1. Brokerage IPO Access Programs

Many major brokerages — including Fidelity, Charles Schwab, TD Ameritrade, and E*TRADE — offer IPO participation programs that allow eligible retail investors to request shares at the offering price. Eligibility often depends on:

• Account size (some platforms require $100,000+ in assets)
• Trading activity and account tenure
• Platform-specific criteria

If you're allocated shares through this route, you receive them at the IPO price, before the stock opens for trading. This is the closest most individual investors get to institutional-level access.

2. Platforms Built for Retail IPO Access

Several fintech platforms have emerged specifically to democratize IPO access:

• Robinhood offers IPO Access, allowing eligible users to request shares in upcoming IPOs at the offering price
• SoFi provides IPO investing to its members through a partnership with underwriters
• ClickIPO connects retail investors directly with IPO allocations

Allocations through these platforms are often small and not guaranteed, but they represent a meaningful shift in how retail investors can participate.

3. Direct Listings and Dutch Auction IPOs

Some companies bypass the traditional IPO process entirely. In a direct listing, the company doesn't issue new shares — it simply lists existing shares on an exchange. Spotify and Coinbase used this approach. Retail investors can buy shares when trading opens, but there's no fixed offering price.

In a Dutch auction IPO, investors submit bids at various prices, and the final offering price is set where demand meets supply. Google's 2004 IPO used this method, explicitly designed to give retail investors a fair shot.

4. IPO ETFs and Mutual Funds

If direct share access isn't available or practical, IPO-focused ETFs offer diversified exposure. Funds like the Renaissance IPO ETF (IPO) and First Trust US Equity Opportunities ETF (FPX) invest in newly public companies, offering a managed approach to the IPO market without requiring individual stock selection.

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Advantages of IPO Investment

When approached with proper diligence, IPO investing offers several distinct advantages.

Early Entry Into High-Growth Companies

IPOs often represent companies at an inflection point — scaling rapidly, entering new markets, or disrupting established industries. Buying at or near the IPO stage gives investors the opportunity to participate in that growth before the company's full story is reflected in a mature market valuation.

Potential for Strong Early Returns

Data from the University of Florida's Warrington College of Business, maintained by professor Jay Ritter, shows that the average first-day return for U.S. IPOs from 1980–2022 was approximately 18.7%. While this average is influenced by outliers, it illustrates that meaningful early price appreciation is a real phenomenon, not just anecdotal.

Access to Private-Market-Style Growth

For decades, the most significant value creation in tech companies happened privately — before they listed. As IPOs increasingly occur later in a company's lifecycle, getting in at the IPO stage still represents earlier access than waiting for the stock to mature on the public market.

Liquidity Advantages Over Private Investment

Unlike angel investing or venture capital, IPO shares are liquid once the lockup period expires (typically 90–180 days post-listing). This gives investors more flexibility to adjust positions compared to being locked into a private investment for years.

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Is IPO a Good Investment? The Honest Assessment

The short answer: it depends on the company, the valuation, the timing, and your discipline.

The Case For

• Blue-chip companies like Google (now Alphabet), Amazon, and Facebook generated extraordinary long-term returns from their IPO prices
• Early investors in Nvidia at its 1999 IPO at $12 per share would have seen returns exceeding 30,000% by 2024
• IPOs in certain sectors — particularly tech and biotech — can reflect genuine innovation with durable competitive advantages

The Case Against

• Research consistently shows that on average, IPOs underperform the broader market over a 3–5 year period following listing. Ritter's data indicates that the average 3-year return of IPOs from 1980–2022 lagged the Russell 2000 index by approximately 20 percentage points
• IPOs are priced to benefit issuers and underwriters, not retail buyers — the incentive structure is not inherently in your favor
• Post-lockup selling by insiders and early investors frequently creates downward price pressure 90–180 days after listing

The Nuanced Reality

IPO investing isn't categorically good or bad — it's a tool. The investors who consistently do well treat IPOs like any other investment: they analyze the fundamentals, assess the valuation relative to peers, understand the company's path to profitability, and size their position accordingly. The investors who get burned typically buy based on name recognition and momentum, without examining what they're actually paying for.

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A Practical Framework for Evaluating an IPO

Before committing capital, work through these questions:

1. What does the S-1 actually say? The SEC filing contains everything you need: revenue growth rates, gross margins, customer acquisition costs, competitive risks, and management backgrounds. Read it — or at minimum, read a thorough summary from a credible financial source.

2. How is the company valued relative to peers? Price-to-sales and price-to-earnings ratios relative to comparable public companies matter. An IPO priced at 30x revenue in a sector where comps trade at 10x is pricing in enormous future growth that may never materialize.

3. Who is selling and why? Is the IPO primarily offering new shares (proceeds going to the company for growth) or secondary shares (proceeds going to existing shareholders cashing out)? A heavy secondary component can signal that insiders think the valuation is at or near peak.

4. What is the lockup expiration date? Mark it on your calendar. Significant insider selling after lockup expiration is common and can suppress the stock price.

5. What is your time horizon and position size? IPOs are volatile. A reasonable position size — not more than 2–5% of a diversified portfolio for most investors — limits the damage if the trade goes wrong.

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Key Takeaways

• IPO investing is accessible to individual investors through brokerage programs, retail-focused platforms, and IPO ETFs — but direct offering-price allocation isn't guaranteed
• The advantages of IPO investment include early growth access, potential first-day returns, and liquidity compared to private market alternatives
• Average long-term performance of IPOs trails the broader market — success depends on selectivity and valuation discipline, not momentum-chasing
• Read the S-1, understand the valuation, track the lockup expiration, and size your position appropriately
• IPO ETFs offer a low-effort way to gain diversified exposure without single-stock concentration risk

IPOs are one of the more exciting corners of public market investing — and one of the most misunderstood. With the right framework, they can be a meaningful part of an individual investor's strategy. Without it, they're often just an expensive lesson in market hype.