When a company you have followed for years announces an IPO, it can create an immediate feeling:
I do not want to miss this.
Maybe you use the company’s products. Maybe you have watched its growth. Maybe friends are talking about buying shares, and you are wondering whether this could be one of those investments people someday wish they had bought earlier.
That excitement is understandable. But it can also make it harder to separate a compelling company from a compelling investment.
An initial public offering, or IPO, gives investors an opportunity to purchase shares of a company as it enters the public market. There can be a real sense of excitement around getting in early, particularly when the company has a strong story or significant growth expectations.
But before asking, “How do I get shares?” there may be a more important question:
“Does participating in this IPO make sense within my financial plan?”
Those are two very different questions.
First, What Exactly Are You Buying?
An IPO occurs when a privately held company begins offering shares to public investors.
That can create an opportunity to participate in the future growth of a business. But a newly public company may have less history available to evaluate than one that has traded publicly for decades.
IPOs can create urgency. Headlines, first-day price jumps, and conversations about “getting in early” can make waiting feel like missing out.
But urgency is not the same thing as opportunity.
Excitement is not the same thing as information.
Before investing, consider the company’s financial condition, path toward profitability, competitive position, valuation, risks, and how it intends to use the money it is raising. The IPO prospectus can provide much of this information.
Getting In Early Does Not Necessarily Mean Getting a Bargain
One misconception surrounding IPOs is that the IPO price represents an opportunity to buy a company “before everyone else.”
Not necessarily.
The offering price is established through the underwriting process, and shares of highly anticipated IPOs can be difficult for individual investors to obtain at that price. Many investors instead purchase shares once public trading begins, potentially at a substantially different valuation.
Historically, IPOs have frequently experienced significant first-day price movements. What happens over the following months and years is much less predictable. Long-term U.S. IPO research demonstrates substantial differences in performance depending on the company, profitability, industry, offering characteristics, and period studied.
There is Not a Reliable Post-IPO Price Pattern
Some stocks continue climbing. Others fall below their offering price. Some recover, while others may take years — or never return to their previous valuation.
Another date worth understanding is the lock-up expiration. Founders, employees, and early investors are often restricted from selling shares for a period following an IPO, commonly around 180 days. When those restrictions expire, additional shares may become available for sale, potentially creating another period of volatility.
Rather than assuming you need to invest immediately, several quarters of public financial results, earnings calls, and market price discovery may provide valuable information.
Sometimes patience is an investment strategy, too.
Consider the IPO in the Context of Your Portfolio
Suppose you have researched the company and still want to invest.
Now the financial planning questions begin.
There is one question worth asking early: If I am wrong, does it matter?
Losing 40% on a small speculative position may be disappointing. Losing 40% on money earmarked for retirement, a home purchase, college costs, or another important goal is something entirely different.
The issue is not simply whether you can tolerate seeing the stock price fall.
It is whether a bad outcome could change something important in your life.
One way to think about an IPO is as a satellite position around an otherwise diversified portfolio. Consider the investment relative to your overall wealth, existing exposure, income sources, and financial goals.
Concentration can also be less obvious than it appears. Someone who works in technology, receives company stock as compensation, and already owns substantial technology investments may be adding more exposure to the same economic risks.
Might You Eventually Own the Company Anyway?
Investors using broadly diversified index funds may eventually gain exposure to a successful newly public company through their existing portfolio.
A company does not automatically enter the S&P 500 simply because it becomes large. It must meet eligibility requirements and be selected for inclusion. If added, funds designed to track the index adjust their holdings accordingly.
Depending on the index strategy you own, you may therefore gain exposure without making a concentrated bet during the company’s earliest and potentially most volatile period.
You do not necessarily have to own every future winner on Day One.
What Else Could That Money Be Doing?
Every dollar has more than one possible job.
The money going into an IPO might otherwise strengthen your retirement plan, build your cash reserve, help pay for a child’s education, fund a home purchase, support someone you love, accomplish a charitable goal, pay down debt, or remain invested in a diversified portfolio.
That does not mean you shouldn’t buy the IPO.
It simply means the decision deserves to be compared with what else that money could accomplish for you.
There is also a difference between having the ability to take risk, the willingness to take risk, and needing to take it.
An investor may be financially capable of absorbing a significant loss and emotionally willing to accept volatility. That does not necessarily mean taking concentrated risk improves the probability of accomplishing their goals, particularly for someone who has already accumulated significant wealth.
Before focusing on how much you could make, ask: What happens to my financial plan if I am wrong — and what am I giving up by making this investment?
Do Not Forget About Taxes
A successful IPO investment eventually creates another decision: what to do with the gain.
Depending on your circumstances, considerations may include short- versus long-term capital gains, the Net Investment Income Tax, state income taxes, coordinating gains with investment losses, and spreading sales across tax years.
For investors with charitable goals, appreciated shares may create additional opportunities. Donating shares directly to charity or using a donor-advised fund can produce a different tax result than selling the stock first and donating cash.
Employees, founders, and early investors may face additional complexities depending on how and when their shares were acquired.
The investment decision and the tax decision should not be made independently.
Have an Exit Strategy Before You Need One
Imagine you invest $50,000 and the stock doubles.
You are thrilled.
But now you own $100,000. Then perhaps $150,000. Suddenly the question is no longer whether buying the stock was a good decision.
It is whether you are willing to sell some of a winner.
That can be surprisingly difficult.
Now imagine the opposite. The stock falls 40%.
Do you sell? Buy more? Wait?
Those decisions are much easier to think through before emotion has entered the room.
Consider in advance how much you are willing to invest, how large you are comfortable allowing the position to become, and when you would reduce it.
Success itself can create risk. A modest investment that increases several-fold may become a significant portfolio concentration.
The goal is not to perfectly predict the stock’s future price.
It is to prevent one investment from unexpectedly taking control of your financial plan.
What If You Already Own the Company?
Purchasing an IPO is different from owning shares in a private company that is going public.
For an employee, founder, or early investor, an IPO may represent years — sometimes decades — of work suddenly becoming visible as wealth on a screen.
That can be exciting, but it can also bring enormous uncertainty.
How much should you sell? How much should you keep? What will taxes look like? Is this now enough to retire? How do you diversify without feeling as though you are giving up on the company you helped build?
Taxes, stock compensation, selling restrictions, diversification, liquidity, and concentration may suddenly need to be addressed together.
In those situations, the IPO is not simply an investment opportunity.
It can be a major financial-planning event.
What About Pre-IPO Opportunities?
Pre-IPO investing deserves even greater scrutiny.
These opportunities may involve private shares or funds, transfer restrictions, limited liquidity, additional fees, and securities that can be difficult to value.
There is also a fundamental risk: the anticipated IPO may never happen.
Understanding what you own, how it is valued, what you are paying, and how — or whether — you can eventually sell it is critical.
So, Should You Participate in an IPO?
Maybe.
Before participating, ask yourself three questions:
- Does this investment fit my financial plan?
- What happens if I am wrong?
- What will I do if I am right?
If you can answer those questions thoughtfully, you are likely making a much better decision than someone simply asking, “How do I get in?”
The important question is not simply whether the company succeeds.
It is whether owning it today improves your financial plan.
The Investment Should Fit the Plan — Not the Other Way Around
At WH Cornerstone, we believe investment decisions are best considered as part of your entire financial picture.
An IPO may turn out to be an extraordinary investment. Or it may not.
Either way, your retirement, taxes, liquidity, family, estate plan, risk tolerance, and long-term goals matter more than the outcome of any single stock.
Sometimes the right decision is to participate. Sometimes it is to invest a smaller amount. Sometimes it is to wait — or simply watch from the sidelines.
You do not have to catch every winner to build significant wealth. You need a thoughtful plan that helps you make good decisions when opportunity—and emotion—arrive at the same time.
When an investment opportunity has you wondering, “Should I do this?” it can help to look beyond the investment itself and consider the bigger financial picture.
Start the conversation today by scheduling a call with us. We are here to help.