Investing in Initial public Offerings (IPOs)

An initial public offering (IPO) is when a private company offers shares to the public. It is an exciting time for the company, its original shareholders and the investing public, leading many investors to want to participate. IPOs are often underpriced, creating a perception of a profitable opportunity, but this is not the reality for most investors. The majority of the initial allocation goes to institutional investors or high value brokerage clients, leaving little for retail investors. A 2018 paper found that brokerage revenues were a significant determinant of IPO allocations, which can be influenced by the relationship with a brokerage firm. New mutual funds also tend to get in on initial IPO allocations to boost returns, but this advantage is short-lived and performance falls substantially after six months.