According to research by Jay Ritter at the University of Florida, the average first-day return for IPOs from 1980 to 2022 was 18.4%. But most retail investors never see that upside. The shares that pop the most are typically allocated before public trading begins—to underwriters, institutions, and company insiders.

The common belief that IPOs offer a rare chance to "get in early" often doesn’t match reality. This article explains how the IPO process works behind the scenes, who usually benefits, and what it means for long-term investors weighing whether to participate.

Key Takeaways

• Most of the initial price jump in IPOs goes to institutional investors and insiders who buy before trading opens.
• Retail investors often get access only after the price has already surged.
• Lock-up periods, hype cycles, and post-IPO volatility can trap latecomers in drawdowns.
• Some investors may consider alternative ways to gain exposure to growing companies beyond chasing IPOs.

The Mechanics Behind IPO Gains

When a company goes public, underwriters (typically large investment banks) help price and allocate shares to a select group of early buyers. These buyers are often:

• Institutional investors
• Hedge funds and mutual funds
• High-net-worth clients of the underwriting bank

This group receives shares at the "offering price"—which can be significantly lower than the price when the stock opens to public trading.

• Example: In the 2020 DoorDash IPO, shares were priced at $102 but opened at $182—a 78% jump that early buyers captured before retail investors could buy in.

So while headlines often highlight the stock's jump, the gains are usually already pocketed by those inside the velvet rope.

• Hypothetical: Imagine a retail investor sees a stock open at $182 after reading about its $102 offering price. They buy in at $185, hoping for more upside. But in many cases, IPO stocks retrace as the initial excitement fades—leaving late entrants with losses.

Why Retail Rarely Gets In Early

There are two reasons most individual investors miss the offering price:

1. Access is limited: Underwriters allocate shares to preferred clients. Unless a retail investor has a high account balance with a participating brokerage, they likely won't get shares pre-IPO.
2. Hype drives demand: Popular IPOs are often oversubscribed, meaning demand exceeds available shares. This further narrows the access window.

Some platforms offer IPO access to retail investors, but allocations are often small and not guaranteed. Many still end up buying after trading begins—at already-inflated prices.

What Happens After the First Day?

While some IPOs hold their gains, others fall sharply after the initial pop. Ritter’s data show that IPOs from 1980–2023 delivered an average three-year market-adjusted buy-and-hold return of -20.2%, underscoring their consistent underperformance relative to the broader market.

Contributing factors include:

• Lock-up expirations, when insiders are allowed to sell their shares
• High initial valuations with little track record
• Shifts in market sentiment or economic outlook

Behaviorally, investors are also prone to FOMO—buying in during the buzz, only to sell at a loss once momentum fades. This mismatch between expectation and outcome can erode trust in equity investing altogether.

So what? For investors trying to build long-term wealth, it’s worth asking: are IPOs really the right entry point—or just another hype cycle that benefits those already inside?

Other Ways to Gain Exposure to Growth

Some investors may consider broader strategies to gain exposure to innovation without chasing IPO pops:

• Diversified ETFs that include newly public companies
• Private equity or pre-IPO access (though typically limited to accredited investors)
• Holding mature growth companies with strong fundamentals

These approaches won’t offer quick gains, but may help align risk and reward over a longer horizon.

Many IPOs Benefit Insiders First

The data is clear: IPOs often reward those closest to the deal—not everyday investors. While some retail traders do profit in the short term, it usually requires impeccable timing and a willingness to trade volatility.

A more sustainable path may be focusing on long-term ownership, steady compounding, and resisting the allure of one-day headlines.