The Truth About IPOs: What Wall Street Doesn’t Tell Busy, High-Earning Investors

By Hazel Secco, CFP® CDFA® | Align Financial Solutions

IPOs are one of the most talked-about corners of the stock market. Every few months a high-profile company goes public, the headlines follow, and someone in your group chat asks whether you’re getting in.

If you’re a high-earning professional, the question can hit even closer to home. Maybe your own company is talking about going public. Maybe a friend just made money on a hot listing and you’re wondering if you’re leaving something on the table.

That quiet second-guessing is familiar to a lot of successful people. You’ve worked hard for your money, you want it working just as hard for you, and you don’t have spare hours to research every opportunity that crosses your screen.

So let’s look at IPO investing clearly. What an IPO actually is, what the long-term data shows, how to participate if you want exposure, and what to think about if the IPO in question is your own employer.

What an IPO Is?

IPO stands for initial public offering. It’s the day a private company first sells its stock on a public exchange like the New York Stock Exchange or Nasdaq.

Before that day, only employees, founders, and professional investors can own shares. After it, anyone with a brokerage account can buy and sell them.

“Pre-IPO” refers to ownership in a company that hasn’t gone public yet. Until recently, only large institutional investors and wealthy individuals could own private company shares. New platforms and fund structures have changed that somewhat, though access still varies a lot by investor type.

The key difference: public stocks can be bought and sold any time the market is open. Pre-IPO shares are typically illiquid, harder to value, and may carry restrictions on when they can be sold.

Why IPOs Attract So Much Attention

Part of the appeal is the chance to own a stake in a company early in its public life. Some IPOs jump significantly on their first day of trading, and the long-term historical average first-day gain across U.S. IPOs has been around 18% to 19%.

There’s also the lottery-ticket allure. A handful of IPOs over the years have produced enormous long-term returns. Amazon, Google, and Nvidia all started as IPOs.

And IPOs are often associated with new technologies or business models that aren’t represented elsewhere in the broad market, which makes them feel like a way to invest in the future.

These opportunities are real. They’re also unevenly distributed, which is where the historical data becomes useful.

What the Data Shows About IPO Performance

Who actually gets the first-day pop

HWhen an IPO’s price jumps on day one, that gain typically goes to institutional investors who received shares at the offer price set the night before trading begins.

Everyone else, including most individual investors, buys after the stock starts trading at its new, higher market price. By the time you can click “buy,” the headline pop has usually already happened.

How IPOs have performed as a group

Academic research on IPOs goes back decades. One of the most-cited researchers in the field is Professor Jay Ritter at the University of Florida, who maintains an ongoing database of IPO performance.

His study of nearly 1,500 U.S. IPOs from 2012 through 2021 found that, over the three years after going public, they trailed comparable companies by roughly 16% to 19%.

Recent IPO Performance Compared With the S&P 500

More recent data shows a similar pattern. Here’s how a widely tracked basket of recent U.S. IPOs compared to the S&P 500 over the past two years:

Year	Recent IPOs (as a group)	S&P 500
2024	~15.7%	~25.0%
2025	~5.4%	~17.9%

In both 2024 and 2025, the IPO group returned roughly 9 to 12 percentage points less per year than the broader market. Individual IPOs varied widely. Healthcare names averaged a gain of roughly 52% in 2025, while technology-sector IPOs posted a loss of roughly 7% overall, but the group as a whole lagged.

Returns are also highly skewed. A small number of large winners pull the averages up, while the typical IPO produces below-average results. IPOs that decline on their first day tend to keep underperforming. Of those “broken” IPOs in Ritter’s data, roughly two out of three had negative three-year returns. Identifying the standout names in advance is exactly what makes IPO investing difficult, even for professionals who do this full time.

Lockup periods

When a company goes public, the people who already own shares, including employees and early investors, generally agree not to sell for a set period, usually 90 to 180 days. This is called a lockup.

When it ends, a large supply of insider shares becomes available to sell, and prices often drift lower around that date. Ritter’s data suggests IPO underperformance tends to widen during the months right after lockup expiration.

The information gap

In an IPO, the people selling shares, meaning the founders, early investors, and underwriting banks, know the company far better than the people buying. They’ve also chosen this particular moment to sell.

That doesn’t mean the price is wrong. It’s simply a factor worth keeping in mind when evaluating any new listing.

Ways to Invest in IPOs and Pre-IPOs

If you’ve decided you want some exposure, there are several paths. They vary in accessibility, cost, and liquidity.

1. Direct IPO allocations through a broker

Some brokerages offer retail customers the chance to buy IPO shares at the offer price. Allocations are typically small, often 10 to 200 shares, come with account-size or trading-history requirements, and are most often available for deals where institutional demand was lighter.

2. Buying shares on the open market after listing

This is the most common path. Once an IPO begins trading, the stock can be bought through any standard brokerage account like any other stock.

The trade-off is that the first-day price increase has typically already occurred, and the lockup expiration often follows a few months later.

3. IPO-focused ETFs

Several ETFs focus on recently public companies, offering diversified exposure across many IPOs without the need to select individual deals. They generally hold the largest and most liquid recent U.S. IPOs for a defined window, typically about the first three years of trading, before rotating them out.

Expense ratios in this category are usually a bit higher than broad-market index funds, often in the 0.55% to 0.65% range. These ETFs solve the access and diversification problems, but they also tend to track the performance of the IPO group as a whole, which historically has lagged the broader market.

4. Pre-IPO secondary marketplaces for accredited investors

There are platforms that let qualified investors buy shares in late-stage private companies from existing shareholders, such as former employees.

To participate, U.S. investors generally need to qualify as accredited. This typically means income of at least $200,000 (or $300,000 with a spouse) or a net worth above $1 million, excluding the value of a primary residence. If your household income is well into six figures, you may already qualify, which is exactly why these platforms market so heavily to people like you.

Minimums vary. Some platforms offer fund-style products starting around $10,000, while direct share purchases often start at $100,000, though some providers have lowered minimums for certain opportunities in recent years.

5. Pre-IPO funds available to all investors

A newer category of funds offers private-company exposure without the accredited-investor requirement. They generally come in two structures.

Interval funds hold private companies and let investors buy in on an ongoing basis, but redemptions are only allowed during scheduled windows, often quarterly. Annual expenses tend to be high relative to public-market funds, sometimes in the 2% to 3% range.

Listed closed-end funds also hold private companies but trade on an exchange like a stock, so they can be bought and sold any time the market is open. Because their share price is set by market demand rather than the fund’s underlying value, the price can swing well above or below the actual worth of the holdings, sometimes by 20% to 30% or more during volatile periods.

6. SPACs

A SPAC, or special purpose acquisition company, is a shell company that raises money through its own IPO and then searches for a private business to merge with. SPAC sponsors typically receive about 20% of the shares as compensation, which dilutes other shareholders.

The due diligence process for SPAC mergers also differs from a traditional IPO. Academic research has generally found weaker post-merger returns for SPACs than for conventional IPOs. The median 2021 SPAC has lost more than 60% of its value.

When the IPO Is Your Company: A Note for Executives and Employees

For many readers, the most important IPO question isn’t whether to buy a stranger’s stock. It’s what to do when your own employer goes public and a meaningful piece of your compensation is suddenly tied up in one ticker symbol.

If you’ve spent years accumulating RSUs, stock options, or ESPP shares at a tech or pharmaceutical company, an IPO can be a genuine wealth-building event. It can also create two challenges that deserve real planning.

Concentration risk

After an IPO, it’s common for company stock to represent 30%, 50%, or even more of a household’s net worth. That’s a lot riding on one company, and it’s the same company that already pays your salary and bonus.

The data above is worth remembering here. Newly public companies, as a group, have tended to lag the broader market in their first few years, and lockup expirations often add downward pressure right when you’re finally allowed to sell.

A thoughtful diversification plan, often built around a schedule of sales after the lockup ends, can turn paper wealth into the foundation of your actual goals, whether that’s financial independence, an early retirement date, or simply more options.

The tax side

Equity compensation around an IPO is where taxes get complicated quickly. RSUs are generally taxed as ordinary income when they vest, which for executives can mean a large income spike in the IPO year.

Exercising incentive stock options can trigger alternative minimum tax, sometimes on gains you haven’t actually received in cash. And the timing of sales determines whether gains are taxed at short-term or long-term capital gains rates.

These decisions interact with everything else in your financial life, including your other income, your state taxes, your charitable giving, and your retirement timeline. The difference between a coordinated tax strategy and a reactive one can be substantial, sometimes reaching into six figures depending on your situation.

If this is your situation, this is the moment to get personalized advice rather than a generic rule of thumb. Ideally before the IPO prices, not after the lockup expires.

Concentration risk

After an IPO, it’s common for company stock to represent 30%, 50%, or even more of a household’s net worth. That’s a lot riding on one company, and it’s the same company that already pays your salary and bonus.

The data above is worth remembering here. Newly public companies, as a group, have tended to lag the broader market in their first few years, and lockup expirations often add downward pressure right when you’re finally allowed to sell.

A thoughtful diversification plan, often built around a schedule of sales after the lockup ends, can turn paper wealth into the foundation of your actual goals, whether that’s financial independence, an early retirement date, or simply more options.

The tax side

Equity compensation around an IPO is where taxes get complicated quickly. RSUs are generally taxed as ordinary income when they vest, which for executives can mean a large income spike in the IPO year.

Exercising incentive stock options can trigger alternative minimum tax, sometimes on gains you haven’t actually received in cash. And the timing of sales determines whether gains are taxed at short-term or long-term capital gains rates.

These decisions interact with everything else in your financial life, including your other income, your state taxes, your charitable giving, and your retirement timeline. The difference between a coordinated tax strategy and a reactive one can be substantial, sometimes reaching into six figures depending on your situation.

If this is your situation, this is the moment to get personalized advice rather than a generic rule of thumb. Ideally before the IPO prices, not after the lockup expires.

So, Should You Invest in an IPO?

The answer depends on your financial plan.

If you already have diversified investments, a strong savings rate, and good risk management, investing a small portion of your assets in an IPO may be reasonable. For some investors, IPO investing can be exciting, as long as the position is limited and does not put long-term goals at risk.

But if you are looking at an IPO as a shortcut to higher returns or a faster retirement, history suggests caution. First-day gains often benefit institutions, long-term IPO performance has often lagged the broader market, and the biggest winners are difficult to identify in advance.

A better question is not, “Could this IPO make money?” It is, “Does this investment support my goals at a risk level I have chosen intentionally?”

That is where a clear financial plan helps. It gives you a framework for deciding when an opportunity fits — and when it is just noise.

Frequently Asked Questions

Can a regular investor buy shares at the IPO offer price?

Sometimes, but not often. Most brokerages reserve their IPO allocations for larger or more active accounts, and the deals where retail allocations are widely available tend to be the ones where institutional demand was lighter. Most individual investors end up buying after the stock begins trading, at whatever price the market sets.

How long is a typical IPO lockup, and what happens when it ends?

A lockup is the period during which existing shareholders, including employees, founders, and early investors, agree not to sell their shares. In the U.S., lockups typically run 90 to 180 days. When the lockup expires, those shareholders are free to sell, and the increased supply of shares often coincides with downward price pressure, though the magnitude varies by company.

What does “accredited investor” mean?

It’s a status defined by U.S. securities regulators that determines who can participate in certain private offerings. In general, individuals qualify by earning at least $200,000 per year (or $300,000 jointly with a spouse) for the past two years with the expectation of the same in the current year, or by having a net worth above $1 million excluding their primary residence. Certain professional licenses also qualify. Many pre-IPO investments are limited to accredited investors.

If IPOs underperform on average, why do companies still go public?

Going public serves the company and its existing shareholders in ways that aren’t reflected in post-IPO stock returns. It raises cash to grow the business, creates publicly traded shares that can be used for acquisitions and employee compensation, and allows early investors and employees to eventually sell their stakes. The fact that IPOs have historically underperformed as an investment doesn’t mean going public is a bad decision for the underlying business.

Are SPACs, direct listings, and traditional IPOs the same thing?

They are all ways for a private company to become publicly traded, but the mechanics differ. A traditional IPO involves underwriting banks pricing and distributing new shares before trading begins. A direct listing skips the underwriting step and simply lets existing shares start trading on an exchange, with no new capital raised. A SPAC is a publicly traded shell company that raises money first, then searches for a private business to merge with. Historical performance has varied across the three structures, with SPACs in particular tending to underperform traditional IPOs.

How are gains and losses from IPO shares taxed?

For most U.S. investors, shares purchased on the public market after listing are taxed like any other stock. Short-term capital gains rates apply if shares are held for a year or less, and long-term capital gains rates apply after that.

Pre-IPO shares and shares received as employee compensation, such as RSUs and stock options, can carry more complex tax treatment, including alternative minimum tax considerations in some cases. Tax outcomes vary based on individual circumstances and are worth reviewing with a qualified tax professional before you make any major moves.

Where can someone find out which companies are planning to IPO?

Companies that intend to go public in the U.S. file an S-1 registration statement with the Securities and Exchange Commission, which becomes publicly available through the SEC’s EDGAR database. Major financial news outlets also report on upcoming offerings, and several websites maintain calendars of expected IPO dates. An S-1 contains detailed information about the company’s financials, risks, and intended use of proceeds.

The Bottom Line

IPOs sit in a part of the market where the public narrative and the long-term data don’t always line up. The headlines emphasize the standout winners and the first-day price moves. The research emphasizes the average outcome, which has historically trailed the broader market over multi-year periods.

What This Means for Your Financial Plan

Both pictures are true. And the right answer for you depends on your goals, your tax situation, your existing portfolio, and, if your company is the one going public, your equity compensation.

Get Personalized IPO Planning Guidance

If you’re navigating an upcoming IPO at your company, or you simply want a second set of eyes on whether your money is working as hard as you do, that’s exactly the kind of personalized planning we do at Align Financial Solutions. You don’t have to figure this out alone, and you don’t have to wonder whether you’re making the best decision for you.

References

• Jay R. Ritter, “Initial Public Offerings: Underpricing” and related IPO data tables, University of Florida (Table 1, mean first-day returns 1980–2025; updated 2026). https://site.warrington.ufl.edu/ritter/ipo-data/
• Renaissance Capital, “US IPO Market: 2025 Annual Review” (sector returns and Renaissance IPO Index performance). https://www.renaissancecapital.com/review/2025USReview_Press.pdf
• Renaissance IPO ETF (NYSE: IPO) fact sheet and summary prospectus, average annual total returns for periods ended December 31, 2025 and December 31, 2024. https://etfs.renaissancecapital.com/us-ipo-etf
• S&P Dow Jones Indices, S&P 500 Total Return Index, calendar-year returns for 2024 (25.0%) and 2025 (17.9%). https://www.spglobal.com/spdji/en/indices/equity/sp-500/
• U.S. Securities and Exchange Commission, accredited investor definition (Regulation D, Rule 501) and EDGAR S-1 registration database. https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor
• Performance figures are current as of year-end 2025 and are subject to change. Index returns are unmanaged and cannot be invested in directly.

Disclosures

This material is for educational and informational purposes only. It is not investment, tax, or legal advice and is not a recommendation to buy or sell any security. Investments in IPOs, pre-IPO companies, ETFs, interval funds, closed-end funds, SPACs, and private securities involve significant risks, including possible loss of principal, illiquidity, limited operating history, and price volatility. Past performance is not indicative of future results. Index returns shown are unmanaged, do not reflect fees, and cannot be invested in directly. Specific funds and platforms are mentioned for illustration only and are not recommendations. Investors should consult their financial advisor, tax professional, and any applicable offering documents before making investment decisions.