As Chief Investment Officer at Confluence Financial Partners, Bill Winkeler, CFA, CFP® oversees the firm’s investment strategy and market research. Below, he explores the opportunities and risks associated with Initial Public Offerings (IPOs).
An Initial Public Offering (IPO) occurs when a private company offers shares of its stock to the public for the first time and begins trading on a public stock exchange. IPOs often generate significant media attention, particularly when well-known or high-growth companies enter the public markets. While the excitement surrounding an IPO can be compelling, it is important for investors to understand both the opportunities and risks involved.
What Makes IPOs Attractive?
Investors are often drawn to IPOs because they can provide an opportunity to invest in a company during the early stages of its public market journey. Successful IPOs can experience strong demand and significant price appreciation, particularly when the company has a compelling growth story, strong financial performance, or operates in a rapidly expanding industry. In fact, according to research from IPO expert Jay Ritter of the University of Florida, the average U.S. IPO generated a first-day gain of approximately 19% from its offering price to its closing price, highlighting the potential for strong initial investor enthusiasm.1
Potential Risks of IPO Investing
While IPOs can offer upside potential, they also carry unique risks:
- Limited Public Track Record: Newly public companies often have less publicly available financial and operating history than established public companies. The SEC notes that newly public companies may have limited operating histories and publicly available information, which can make evaluating risks and future prospects more challenging for investors.4
- Price Volatility: IPO share prices can fluctuate significantly during the first days, weeks, and months of trading. These risks can have a meaningful impact on long-term investment outcomes.
Research from IPO expert Jay Ritter of the University of Florida found that investors who purchased IPOs at the end of their first day of trading historically earned returns that were approximately 21% lower than a value-weighted market index over the subsequent three years, underscoring the importance of careful due diligence and maintaining a disciplined, diversified investment approach.2
- Valuation Uncertainty: Determining a company’s fair value can be challenging, particularly for rapidly growing businesses.
- Lock-Up Expirations: Early investors and company insiders are often restricted from selling shares for a period after the IPO. When these restrictions expire, increased selling activity may impact the stock price.
- Concentration Risk: Investing heavily in a single IPO can create unnecessary portfolio risk.
Who Are IPOs Suitable For?
IPO investments may be more appropriate for investors who:
- Have a high tolerance for risk and volatility.
- Maintain a diversified investment portfolio.
- Have a long-term investment horizon.
- Understand that IPO performance can be unpredictable.
IPOs are typically less suitable for investors whose primary objectives are capital preservation, income generation, or minimizing short-term market fluctuations.
Common IPO Misconceptions
“If I can get shares in an IPO, I’ll automatically make money.”
There is no guarantee that an IPO’s share price will rise after it begins trading. While some IPOs perform well, others may trade below their offering price.
“Popular companies always make successful investments.”
A well-known brand or strong media attention does not necessarily translate into attractive long-term investment returns.
“Getting access to an IPO means I’m investing before everyone else.”
By the time a company reaches the IPO stage, it has often already received substantial investment from founders, venture capital firms, private equity firms, and other early investors.
“All IPOs are available to all investors.”
Access to IPO shares is often limited. Many offerings allocate shares to institutional investors and select brokerage clients, and demand frequently exceeds available supply. In fact, institutional investors typically receive the majority of IPO allocations, with historical institutional-to-retail allocation splits often around 90/10. As a result, individual investors may have limited access to IPO shares or receive only a small portion of their requested allocation.3
The Bottom Line
IPOs can be an exciting component of the capital markets and may offer attractive growth opportunities. However, they should be evaluated with the same discipline applied to any investment decision. Investors should carefully consider the company’s fundamentals, valuation, risk profile, and how the investment fits within their broader financial planning and long-term objectives.
As with any investment, a well-diversified portfolio and a disciplined investment management strategy can help investors pursue long-term financial goals.
Important Note: Access to IPOs may be subject to brokerage, custodian, regulatory, or employer restrictions. Investors are encouraged to review any applicable policies and eligibility requirements before seeking to participate in an offering. Investing in IPOs involves significant risk, including potential loss of principal, limited operating history, and price volatility. IPO shares may not be available to all investors, and allocation is not guaranteed.
About the Author
Bill Winkeler, CFA, CFP® serves as Chief Investment Officer at Confluence Financial Partners, where he oversees the firm’s investment philosophy, portfolio construction, market research, and investment strategy. With extensive experience in financial markets and wealth management, Bill shares general commentary on investment topics for informational purposes only and not as personalized investment advice to support investor education.
Sources
- Jay Ritter, University of Florida (cited by The Wall Street Journal, 2026): https://site.warrington.ufl.edu/ritter/ipo-data/
- Jay Ritter IPO research: https://site.warrington.ufl.edu/ritter/ipo-data/
- Fidelity IPO Share Allocation Process: https://www.fidelity.com/learning-center/trading-investing/trading/ipo-share-allocation-process
- SEC Investor Bulletin: Investing in an IPO: https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-17
Any views expressed are those of the author as of the date published and are subject to change without notice. Nothing herein constitutes a recommendation to buy or sell any security or to adopt any investment strategy. Confluence Wealth Services, Inc. d/b/a Confluence Financial Partners is a SEC-registered investment adviser. Registration of an investment adviser does not imply any level of skill or training. The content on this page is provided as general information only and should not be construed as an offering of advisory services or a recommendation to buy or sell any security or financial instrument by Confluence Wealth Services, Inc. Investing involves risk; clients may experience a profit or a loss. Please refer to our Form ADV Part 2A and Form CRS for further information regarding our investment services and their corresponding risks. Additional information about Confluence Wealth Services, Inc. is available on the Investment Adviser Public Disclosure (IAPD) website at: www.adviserinfo.sec.gov.