IPOs Make Headlines—But Who Actually Profits?
It’s a common perception that IPOs present a rare opportunity to invest early and ride the wave of fast-growing companies. But research from Jay Ritter at the University of Florida shows that from 1980 to 2022, IPOs delivered an average first-day return of 18.4%—returns that rarely reach individual investors. That early spike usually benefits institutional clients, underwriters, and insiders with pre-market access.
This article breaks down the IPO process, who typically profits, and how individual investors should think about public offerings in the context of long-term goals.
Key Takeaways
- Institutional players and insiders often capture the early price jump by purchasing shares before public trading starts.
- Retail buyers typically get in after prices rise, limiting potential gains.
- Volatility, lock-up expirations, and hype-driven momentum often result in losses for those who chase IPOs late.
- Some investors may look to other vehicles for exposure to growth companies, without relying on IPO access.
How IPO Windfalls Are Distributed
When a private company lists its shares publicly, the process is managed by underwriters—usually major investment banks—who set the initial price and decide who gets early allocations. These initial buyers usually include:
- Institutional investors
- Hedge funds and mutual funds
- Wealthy clients of the underwriting bank
This group is offered shares at the "offering price," which is often significantly below the price at which the stock begins trading on public exchanges.
- Example: In the DoorDash IPO of 2020, shares were priced at $102 but debuted on the market at $182—a 78% premium that pre-market investors captured. By the time retail buyers could participate, most of the upside had already been taken.
- Scenario: Picture an investor reading the morning headlines, seeing the offering price at $102 and the opening at $182. They buy at $185, hoping for another leg up. But by then, the surge is largely priced in—and pullbacks are common once enthusiasm cools.
Why Most Individuals Miss Out on the Offering Price
Two primary reasons prevent everyday investors from buying at the pre-market offering price:
- Limited access: Underwriters prioritize favored clients. Without a high net worth or special relationship with a participating broker, individual investors are usually shut out.
- Oversubscription: High-demand IPOs often attract more interest than available shares, squeezing out smaller players entirely.
While some brokers do provide IPO access to retail users, the allocations tend to be minimal and not always filled. In most cases, individual investors end up purchasing after the price has already jumped.
After the Buzz: What Comes Next?
Not every IPO maintains its early gains. In fact, many retrace sharply after the first day. According to Jay Ritter’s research, IPOs between 1980 and 2023 returned an average -20.2% (market-adjusted) over the following three years, highlighting chronic underperformance versus broader indices.
Several forces can drag on post-IPO returns:
- Lock-up period expirations, when insiders can sell shares
- Excessive valuations, with limited operating history to back them up
- Shifting macro conditions that dampen investor appetite
Behaviorally, the fear of missing out often drives people to buy at peaks—only to sell in disappointment as reality sets in. This cycle of overexcitement followed by regret can discourage long-term investing altogether.
Key question: For those aiming to build durable wealth, does it make sense to chase IPO excitement—or are these events mostly beneficial to those with early access?
Broader Strategies for Growth Exposure
Instead of attempting to time IPO entries, some investors explore other ways to gain exposure to innovative companies:
- ETFs or funds that hold newly listed companies as part of a diversified mix
- Private market investments or pre-IPO funds (typically limited to accredited investors)
- Established growth stocks with a proven financial track record
These routes may not deliver the thrill of a one-day pop, but they can offer more balanced exposure to high-growth sectors over time.
Who Gains Most from IPOs?
The trend is consistent: IPOs tend to favor those closest to the deal—banks, institutions, and insiders. While some retail investors manage to profit from short-term trades, this usually requires excellent timing and an appetite for volatility.
For many, a steadier path involves building a diversified portfolio, compounding over time, and tuning out IPO headlines that rarely benefit everyday investors.
