After several quiet years, the market for initial public offerings (IPOs) is showing signs of renewed activity. High-profile companies have gone public and others are preparing to enter the public markets. Financial headlines are once again highlighting the excitement surrounding new stock offerings. While these events often generate enthusiasm, investors should approach them with perspective and discipline.
An IPO occurs when a private company offers shares to the public for the first time. For many investors, IPOs represent an opportunity to participate in a company’s next phase of growth. The appeal is understandable – stories of early investors achieving significant gains can create the impression that getting in early is the key to long-term success.
The reality is often more complicated.
The Challenge of Capturing IPO Returns
Many of the widely publicized gains associated with IPOs occur on the first day of trading. However, access to shares at the initial offering price is typically limited to insiders, large institutions and select investors. By the time most investors can purchase shares, the stock may already be trading significantly above its offering price.
This creates an important distinction between the returns investors read about and the returns they can realistically achieve.
What History Tells Us
Research examining thousands of IPOs1 has found that, while some newly public companies become exceptional long-term investments, IPOs as a group have historically struggled to outperform broader market indexes over time.
One reason is that IPOs often attract substantial media attention and investor enthusiasm. When expectations become elevated, valuations can rise faster than business fundamentals. In some cases, excitement about future potential may already be reflected in the stock price before most investors have an opportunity to participate.
This does not mean IPOs should be avoided. Rather, it highlights the importance of evaluating each opportunity through the same lens used for any other investment: fundamentals, valuation, risk, and how it fits within a broader financial plan.
Staying Focused on What Matters Most
We believe successful investing is rarely driven by chasing headlines or reacting to market trends. Instead, long-term success is built through a disciplined strategy aligned with your goals, values, and financial priorities.
The return of the IPO market may create opportunities, but it should not change the principles that guide sound investment decisions. New companies entering the public markets can eventually become meaningful holdings within existing diversified portfolios without purchasing them individually. The key is avoiding the temptation to let excitement drive decisions.
As with many areas of investing, patience often proves more valuable than speed.
The Bottom Line
A more active IPO market is a sign of confidence in the broader economy and capital markets. That’s positive news. But for most investors, the best approach remains the same: focus on a well-designed investment strategy, maintain diversification, and evaluate opportunities based on long-term fundamentals rather than short-term enthusiasm.
Markets will always create new stories and new opportunities. The challenge isn’t finding them—it’s determining which ones belong in your plan.
Sources:
1Dimensional Fund Advisors, 2019. “IPOs: Profiles Are High. What About Returns?” Study of more than 6,000 U.S. IPOs, January 1991 through December 2018.
Advisory services are offered through Collective Wealth Advisors LLC, a Registered Investment Adviser with the SEC. For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have ap- proved, determined the accuracy, or confirmed the adequacy of this article.
