IPOs are marketed as your chance to buy great companies "early." The reality? By IPO day, early investors are already cashing out - often at your expense.These five myths have cost retail investors millions. Let's debunk them - and show you why pre-IPO investing might be the smarter play.
Myth #1: "IPO Day Is Your Chance to Get In Early"The belief: When a company IPOs, it's your first opportunity to own shares of an exciting new company.The reality: By IPO day, the company is typically 10-15 years old. Early employees and VCs have been holding shares for a decade. The "IPO" is their exit, not your entry. As we explored in our companies that should have stayed private piece, timing is everything.Consider the numbers:Uber: 10 years old at IPO. Early investors up 20,000x.Airbnb: 13 years old at IPO. Founders up 50,000x+.Facebook: 8 years old at IPO. Peter Thiel up 7,600x.What's really happening: The IPO is when insiders convert their paper gains into cash. Retail provides the liquidity. You're not getting in early - you're providing the exit.
Myth #2: "A Big First-Day 'Pop' Is Good for Investors"The belief: When a stock doubles on day one, everyone wins!The reality: A big "pop" means the company was deliberately underpriced. The gain goes to whoever got allocation at the offer price - almost always institutional investors, not you.How it works:Underwriters price the IPO at $30Institutions get allocation at $30Stock opens at $60 (100% pop!)Retail buys at $60+Institutions sell to retailWho won? Institutions who got the $30 allocation. Who lost? Retail who bought at $60 and provided the exit liquidity.This isn't conspiracy theory - it's how IPOs are designed. Underwriters work for institutions, not retail.
Myth #3: "Good Companies Make Good IPO Investments"The belief: If the company is great, the stock will go up. Simple!The reality: Even great companies can be terrible investments at the wrong price. Valuation matters more than quality.Examples:Facebook: Great company. IPO'd at $38, dropped to $18. Took 14 months to recover.Uber: Great company. IPO'd at $45, dropped to $21. Still below IPO price years later.Snap: Cool product. IPO'd at $17, dropped to $5. Took 4 years to recover.The lesson: A company can be wonderful and still be overpriced at IPO. Price matters. Entry point matters. "Good company" is not enough.
Myth #4: "You Should Buy IPOs and Hold Long-Term"The belief: Just buy and hold great companies forever. Time in the market beats timing the market!The reality: Research consistently shows IPOs underperform the market in the years following their debut.The data:Jay Ritter's research: IPOs underperform comparable stocks by ~3% annually for 3-5 years post-IPOMuch of the "return" comes from the first-day pop that retail doesn't captureThe lock-up expiration (90-180 days post-IPO) often creates another wave of selling pressureWhy this happens: IPOs are timed to maximize exit value for insiders, not entry value for new buyers. Companies go public when valuations are high, not when they're cheap.
Myth #5: "IPO Allocation Is Random/Fair"The belief: Everyone has an equal shot at getting IPO shares at the offer price.The reality: IPO allocation is a reward system for the best clients of underwriting banks. Retail gets scraps.How allocation really works:Hedge funds and institutions get first priorityWealth management clients with $1M+ accounts get some accessRetail brokerages might get a tiny allocation for "lottery" distributionYour odds of getting meaningful allocation in a hot IPO: near zeroThe game: Banks deliberately underprice IPOs to reward their best clients. Those clients return the favor with trading commissions. Retail isn't part of this relationship.
What Smart Investors Do InsteadNow that you know the myths, here's what actually works:1. Wait for the lock-up expiration90-180 days after IPO, insiders can finally sell. This often creates better entry points as supply floods the market.2. Focus on valuation, not hypeWould you buy this company at this price if it weren't an IPO? If not, don't buy it. Learn how to evaluate pre-IPO opportunities with a valuation-first mindset.3. Consider pre-IPO accessIf you want "early" exposure, explore pre-IPO investing through secondary markets or platforms like IPO Genie. See our breakdown of pre-IPO vs IPO returns for the full picture.4. Ignore the first-day price actionDay-one moves are noise. Real investing happens over years, not hours.5. Diversify if you must participateIf you're going to buy IPOs, spread across many rather than concentrating in one "sure thing."Related: What is an IPO? | Lock-up Periods Explained | Pre-IPO Investing Guide
Frequently Asked QuestionsQ: Are all IPOs bad investments?No - some IPOs work out great even buying at day-one prices. But the odds are stacked against retail. The IPO process is designed to benefit insiders and institutions, not you.Q: How can I get IPO allocation at the offer price?Unless you have a $1M+ account at a major brokerage, or you're an institutional investor, your chances are slim. Some retail brokerages offer lottery systems, but allocation is tiny.Q: Should I ever buy on IPO day?Only if you've done deep research on valuation, understand the risks, and are prepared to hold through volatility. Never buy just because of hype or FOMO.
