What Is an IPO? How a Listing Works, and What a Basket of New Stocks Returned
An IPO, or initial public offering, is the first time a company sells its shares to the general public, after registering the offering with the SEC. Most individual investors cannot buy at the offering price and instead buy once the shares start trading on an exchange.
A new listing gets more attention than almost any other event in the stock market. This page covers how the process works according to the SEC’s own investor bulletin, and what thirteen years of a basket of new listings actually returned.
How it works
The SEC’s bulletin, dated 14 October 2022 and read on 25 September 2026, describes an IPO as “the first time a company offers its shares of capital stock to the general public.” Under federal law those shares cannot be offered unless the offering is registered or an exemption applies.
Registration is a filing, usually on Form S-1. The core of it is the prospectus, the document that describes the business, the terms of the deal, the risks and the financial statements. Filings and their amendments, marked S-1/A, are public on the SEC’s EDGAR database.
The SEC staff reviews the filing, then declares it effective. The bulletin is blunt about what that means: effectiveness “does not represent an approval of the merits of the IPO.” The staff checks disclosure, not whether the company is a good investment.
Underwriters, the investment banks running the deal, gather “indications of interest” from their clients. They use that order book to recommend a price, and the issuer sets the final one. After effectiveness, a final prospectus is filed, usually labeled 424B3 or 424B4 on EDGAR, carrying the price.
Then the shares list on an exchange such as the NYSE or Nasdaq, and ordinary trading begins. From that day the company files quarterly and annual reports like any other public company.
Who gets the shares
Most of the allocation goes to institutions. The bulletin says underwriters and dealers often distribute most IPO shares “to their institutional and high net-worth clients,” such as mutual funds, hedge funds and pension funds.
For everyone else, the usual route is the open market. The bulletin calls buying after trading starts “more common in the case of individual investors.” That means paying whatever the market sets on the first day, not the offering price.
The offering price and the trading price can be far apart. The SEC notes the offering price “may bear little relationship to the trading price.” Underwriters may also support the price in the first days by buying shares, and once that support ends, the price may fall significantly.
Lock-ups and the float
On the first day, few shares can trade. Founders, early investors and employees usually cannot sell yet, either because their shares are restricted or because they signed a lock-up. The bulletin says lock-ups last “typically 180 days.”
That small float can push a popular listing up fast, because limited supply meets heavy demand. The same mechanism works in reverse later. The bulletin describes the shares that cannot yet trade as “market overhang,” and warns that prices may fall when lock-ups expire and many shares become sellable at once.
The prospectus says how large that overhang is, under a heading like “Shares Eligible for Future Sale.” It also discloses dual-class structures, where founders hold shares with extra votes, and emerging growth company status, which phases in some disclosure rules for up to five years.
A worked example
Take a hypothetical company with 80,000,000 shares held by insiders. It sells 20,000,000 new shares in its IPO at $20 each, raising $400,000,000 before underwriting fees. It now has 100,000,000 shares outstanding.
On day one, the tradable supply is the 20,000,000 IPO shares: 20% of the company. The other 80,000,000 are locked up for 180 days.
Now suppose it opens at $30. A buyer at the open pays $30 for a share an allocated client got for $20, which is 50% more. The company, which sold at $20, raised money at a price the market says was too low.
At the lock-up expiry, up to 80,000,000 more shares can be sold. The possible tradable supply goes from 20,000,000 to 100,000,000, five times as many. Not every insider sells, but the date is known in advance and the size of the overhang is printed in the prospectus.
A buyer who reads that section knows, before buying, both the lock-up end date and the number of shares that become sellable on it. In this example that is 80,000,000 shares, four times the day-one float.
The original data
The Renaissance IPO ETF (ticker IPO) holds recent US listings. Its fund page, read on 25 September 2026, says constituents “cycle out three years after their IPO” and are weighted by float-adjusted market value with a 10% cap. So its price is a running record of how a basket of new listings did after they began trading.
From 16 October 2013 to 24 September 2026, using Yahoo Finance adjusted closes, the fund returned 180.1%. SPY, an S&P 500 fund, returned 454.7% over the same 3,254 shared trading days. That is $10,000 growing to $28,007 in the IPO fund and to $55,467 in SPY, or 8.3% a year against 14.2%, over 12.9 years.
Its worst fall was 68.8%, from 12 February 2021 to 28 December 2022. SPY’s worst over the period was 33.7%, from 19 February to 23 March 2020.
In calendar years 2014 to 2025, the IPO fund beat SPY in 4 of 12. Its best year, 2020, was +107.9% against +18.3%, a gap of 89.6 points. Its worst, 2022, was −57.3% against −18.2%, a gap of 39.1 points.
The yearly gaps from 2014 were −6.1, −9.6, −12.8, +15.5, −12.7, +3.2, +89.6, −39.0, −39.1, +26.4, −9.2 and −12.3 points. In 2026 to 24 September it was up 18.0% against 13.4%. The year-by-year CSV lists every figure.
What that suggests: new listings as a group swing far more than the broad market, in both directions, and over this stretch the swings did not add up to more return. The gap in yearly rates, 8.3% against 14.2%, was 5.9 points. It is one fund and one period, not proof about every IPO.
In this site’s study of 24,971 trading and investing videos, deduplicated by video id, 5 put “IPO” in the title, at a median of 4,735 views. The two above 20,000 are general stock-market explainers that mention IPOs in passing, and two of the other three are about a single company’s listing.
When it fails
The first failure is treating the first-day move as the investment. A large first-day jump mostly goes to those who were allocated shares. A buyer at the open starts from the new price, not the offering price.
The second is ignoring the lock-up date. A stock with a small float can look strong for months and then meet a large block of sellable shares on a date that was printed in the prospectus from the start.
The third is reading SEC effectiveness as a seal of approval. The bulletin says in plain words that it is not. The review checks what is disclosed, not whether the business will work.
A fourth is judging IPOs by the famous winners. The fund figures above include every listing large enough to qualify, not only the ones people remember, and as a group they trailed the S&P 500 over this period while falling much further in the bad years.
And a fifth is skipping the risk factors because the story is exciting. A new company often has little public history, so the prospectus may be the only detailed record available. The bulletin’s advice is to read it, check the latest amendment, and verify what you can elsewhere.
Related
The float page explains why the tradable share count, not the total, drives how a new listing moves. The stock exchange page covers where the shares list and how trading there works. And the common stock page sets out what a shareholder actually owns, which is worth knowing before a prospectus mentions a dual-class structure.
Read the Shares Eligible for Future Sale section of the prospectus before buying a new listing, and put the lock-up expiry date in a calendar. It is the one future supply event that is printed in advance.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.