IPO (Initial Public Offering)

What is IPO (Initial Public Offering)? — Definition

An IPO is the process by which a private company becomes publicly traded. The company works with investment banks to set an offering price, sell shares to institutional investors, and then list on an exchange. This raises capital for the company and gives early investors (founders, venture capitalists) liquidity to cash out some or all of their ownership.

IPOs are often surrounded by hype, but the data on IPO performance is sobering. Studies show that IPOs tend to underperform the market in the 3–5 years following the offering. Institutional investors typically get the best allocations at the IPO price; retail investors often buy at inflated prices in the post-IPO frenzy.

Example

Uber went public in May 2019 at $45/share with a $82 billion valuation. The stock immediately fell below the IPO price. Three years later, it was still below $45. Meanwhile, investors who bought after the initial hype faded and fundamentals improved were well rewarded.

When major IPOs occur in sectors tracked by BMInsider's Smart Money Tracker, our analysis compares the offering price to fundamental valuation to help subscribers decide whether to buy at open or wait for a better entry.