Investing in an IPO: risks, opportunities, and what to check

An IPO is often the first chance for retail investors to buy shares in a company, so it's no wonder they can generate buzz and excitement.

Many public companies began life on the stock market through an IPO. Newly listed shares can offer great potential, but they are also often volatile, hard to price, and backed by limited information.

Find out more about how IPOs work, how investors can take part, and information about the risks and opportunities involved.

What is an IPO?

An IPO is an initial public offering. This is when a private company publicly offers shares to investors for the first time. 

Before an IPO, or other method of joining a public market, a company is referred to as ‘private’. Private companies may still have investors, but shares cannot be traded on public markets like the London Stock Exchange or NASDAQ.

Companies might go public to:

• Raise money by selling shares
• Offer existing investors and employees a way to sell stock
• Increase their public profile

However, listing comes with its fair share of challenges, too. 

Public companies face greater regulatory scrutiny, must meet reporting requirements, and could see their shares fluctuate with wider market movements. There are also costs associated with organising an IPO, including hiring investment banks to advise on and underwrite the listing. 

How can you invest in an IPO?

If investors have access to an IPO, they might be able to register an application for shares during the offer period, which takes place in advance of the IPO. If successful, they will be able to buy at the IPO price. 

This is purchasing through the primary market.

The IPO price is determined by the company and its advisors, including the investment banks hired to underwrite the listing. Factors such as a company valuation, investor demand, and current market conditions are used to determine the price investors pay at IPO.

Often, a large portion of the shares sold on the primary market is reserved for institutional investors. However, retail investors may be able to apply for an allocation, depending on the circumstances of the IPO and the platform they use.

Missing out on this doesn't need to be the end, though. 

That’s because investors can still get involved in an IPO by investing via the secondary market. Here, you trade at the live market price once the stock is listed on the stock exchange. 

Why investors are interested in IPOs

Investors can get pretty excited about public listings. Why? First off, it’s the first time they may have the opportunity to invest in a company previously restricted to its founders, employees, and private equity investors.

IPOs can also give investors access to growing businesses trying something new. Going public can represent a new lifecycle stage for these companies. 

This means they might also represent a sector or theme not already well represented in an investor's portfolio. 

Main risks of IPO investing

Newly listed companies have limited available information and no public share price history. That can make research harder than it would be for a more established listed company. It also means investors have less evidence of how the share price might behave in different market conditions.

Then there’s the matter of general share price movement after an IPO. 

Data from the University of Florida found that US IPOs from 1980 to 2025 produced an average first-day return of 19.0%. Sounds great, but research from the National Bureau of Economic Research showed nearly a third of IPOs between 1965 and 2005 produced negative initial returns.

The upshot? IPOs are very hard to price accurately and prone to wild swings as the new shares settle into the market. 

When shares become available on the public market, depending on the listing venue, they may be subject to conditional dealing. During this period of deferred settlement, trades are not guaranteed to go through. Unconditional trading, where shares trade as normal, should follow within a couple of days.

And that’s just the initial bumpiness. Over the long term, there are other risks. 

Some IPO companies are still scaling, selling shares to fund capital reinvestment into the business. Some may not yet be profitable, and trade at a premium based on potential they never end up reaching. 

There’s also allocation risk. If an IPO is popular, applicants might not receive the full number of shares they applied for. If it’s extremely popular, they might be lucky to receive any at all.

It’s also worth noting IPO investing also carries the same risks associated with investing in other equities. For example, be aware that IPO investments may leave your portfolio exposed to particular currencies, geographies, and sectors, particularly if you have not diversified. 

Lock-up period risk

One key risk to flag centres around a stock’s so-called lock-up period. This is the period, which may last for as much as 180 days, for which existing shareholders are barred from selling shares. 

These existing shareholders may be employees who have been paid in or awarded stock, or investors who built their position when the company was private.

Once the lock-up period expires, significant selling can occur as these shareholders look to finally take advantage of being able to use the secondary market. This may put pressure on a company’s share price, and could even signal that insiders’ confidence in the business is low. 

Lock-up periods are not mandatory, but they are common. They are usually disclosed in the prospectus a company releases pre-IPO. 

What to check before investing in an IPO

Before investing, make sure to do your due diligence. Here is a checklist:

1. Read the prospectus

Read the prospectus carefully. It should explain the company’s business model, financial performance, key risks, debt, use of proceeds, major shareholders, and any lock-up arrangements.

2. Do you understand the company?

If you cannot understand how a company makes money, it might not be the right investment for you. If you can’t get your head around how the business operates, how can you make decisions about your holdings? 

3. Do you understand the risks?

There are intrinsic risks to investing at IPO, and to every company’s forward progress. A business might be highly exposed to certain markets, commodity prices, or other factors. It might have a lock-up period that could lead to a sudden bout of legacy shareholders selling. Understanding these before you invest will stop them from being a nasty surprise down the road.

4. What’s the valuation?

It might not be the best idea to buy at IPO just because a company is making money and you think its business plan looks solid. Compare the company’s valuation with its peers. How does its revenue growth, profit margin, and balance sheet stack up with competitors?

5. Check the use of IPO proceeds

Why did the company raise money? Are the proceeds being used to invest in growth, repay debt, or provide liquidity to existing shareholders? Make sure you are comfortable with the company’s intentions. After all, it might be your money they are using.

6. Does it suit your portfolio?

Does the investment fit your goals, risk tolerance, time horizon, and diversification needs? Can it be held in your ISA, SIPP, or any other investment account you plan on using?

7. Are you on the hype train?

IPOs can seem exciting and time sensitive, leaving some investors feeling a bit of FOMO. Don’t let this cloud your judgment. Make sure to check whether the investment is right for you.

8. Do you understand the application process?

Ensure you read up on the application process before you apply for your allocation. Otherwise, you might end up with too large or too small an allocation, or risk having cash you need access to locked away. If the IPO is in a different currency, are you aware of the FX fees and the impact this will have on the allocation received?

9. What can you afford to lose?

Investing at IPO can be high risk, even if a company seems well-known and reputable. Don’t invest with money you cannot afford to lose, like cash you might need for an emergency fund, personal expenses, debt repayments, or other key expenses.

IPO investing - FAQs

How much do IPO shares cost?

The cost of shares at IPO varies, and is determined by the company and its advisors. Once the shares are available on the secondary market, the market price is determined by market demand.

Can you lose money investing in an IPO?

Yes. As with all investments, the value of your investment can go down as well as up, and you may get back less than you invest. 

Is an IPO the same as a float?

In the UK, an IPO may be referred to as a ‘float’. You might see media reports stating that a company is floating on the LSE, for example. The ‘float’ can also be used to refer to the body of shares being made available to trade on the public market. 

Is an IPO the same as a direct listing?

No, an IPO is not the same as a direct listing. 

A direct listing sees a company join the public market without issuing additional shares and without the use of intermediaries. This gives existing shareholders the means to sell their equity to public investors. Historically, because no new shares are issued, a direct listing raises no capital for the company. 

Are IPOs a good investment?

There is no catch-all rule as to whether an IPO will land you with good returns or a loss. Different IPOs can vary significantly in character, so make sure you do your research, consider the makeup of your portfolio, and think about your needs before deciding to invest.