How do IPOs Work?

Summary of How do IPOs Work?

by DIY Money

25m•June 17, 2026
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Overview of How do IPOs Work? — DIY Money

This episode is a “back to the classroom” breakdown of how IPOs work, using the highly anticipated SpaceX IPO as a current example. The hosts explain the mechanics of an initial public offering, why the media often makes IPO day seem more exciting than it really is for everyday investors, and why chasing the first day of trading can be risky.

Key Discussion Points

Quint’s update

  • Quint shares a personal update about spending several weeks in Italy teaching abroad and then traveling with family.
  • He reflects on the value of traveling, learning new cultures, and gaining a deeper appreciation for the U.S.

Why the SpaceX IPO matters

  • The SpaceX IPO is described as a major market event and likely one of the largest IPOs ever.
  • The hosts note that there is a lot of hype and a lot of retail investor curiosity around whether they should buy in.

How an IPO Works

1. The company files an S-1

  • A company planning to go public files an S-1 with the SEC.
  • This filing says the company intends to sell shares to the public.

2. Investment banks manage the deal

  • The company hires one or more investment banks to underwrite and market the offering.
  • These banks help determine:
    • valuation,
    • offering price range,
    • demand from institutions.

3. The roadshow

  • The bankers take the company on a “roadshow” to pitch the offering to large institutional investors.
  • Buyers can include:
    • mutual funds,
    • pension funds,
    • sovereign wealth funds,
    • other large institutions.

4. Pricing based on demand

  • Institutions submit indications of interest for how many shares they want.
  • If demand exceeds supply, the IPO is oversubscribed.
  • The final IPO price is typically set near the high end of the range if demand is strong.

5. First-day trading is different from IPO pricing

  • Retail investors do not get the IPO price.
  • Most individual buyers only get access once the stock starts trading publicly, which is often at a much higher price than the IPO price.
  • The episode notes that over the last decade, many major IPOs opened, on average, about 52% above their IPO price.

Why IPO Hype Can Mislead Investors

Retail investors usually pay more

  • The media often focuses on the stock’s first-day pop.
  • But if you’re a retail investor, you’re generally buying at the opening market price, not the original institutional IPO price.
  • That means “it went up 100% on day one” does not mean you had the chance to buy at the IPO price.

Lockup periods matter

  • Early employees and insiders are often subject to lockup periods before they can sell their shares.
  • These lockups are commonly around 6 to 18 months.
  • When those shares eventually unlock, additional selling pressure can push the price lower.

IPOs often underperform over time

  • The episode cites research showing that, on average:
    • 6 months after an IPO, shares are down about 16%
    • 12 months after an IPO, shares are down about 24%
  • The hosts emphasize that IPOs often see excitement up front, but performance later can disappoint.

Historical Examples Mentioned

Uber

  • Strong hype surrounded Uber’s IPO.
  • Results cited:
    • 6 months later: down 21%
    • 12 months later: down 29%

Airbnb

  • Airbnb is an example of a huge first-day pop:
    • IPO price: $68
    • Opening print: $146
    • First-day gain: 115%
  • Even so, the episode notes that long-term returns were not as dramatic as the first-day excitement suggested.

How IPOs Have Changed

Historically

  • IPOs used to be primarily about raising capital to grow the business.
  • Companies went public because they needed money to expand operations.

Today

  • Many companies, especially high-growth firms, already have access to plenty of private capital.
  • Going public is often more about:
    • giving early investors liquidity,
    • allowing employees to sell shares,
    • creating a public market for the stock.
  • In other words, IPOs today are often less about funding growth and more about enabling exits.

Specific Takeaways on SpaceX

  • SpaceX may become a highly important and valuable public company over time.
  • The hosts are bullish on its long-term potential.
  • But they strongly caution against:
    • rushing in on day one,
    • buying due to hype,
    • assuming first-day momentum equals long-term value.
  • Quint says he expects any future ownership of SpaceX would likely happen later, not at the IPO.

Practical Advice for Investors

  • Don’t chase IPO hype.
  • Understand you are likely not getting the IPO price.
  • Be aware of lockups and insider selling pressure.
  • Focus on your long-term plan instead of first-day headlines.
  • Even great companies can be poor short-term investments at the wrong price.

Final Recommendation from the Episode

The hosts’ overall message is simple:

  • IPOs can be exciting and important.
  • But for most investors, they are not a good place to speculate on day-one momentum.
  • The better approach is to stay disciplined, avoid emotional buying, and invest according to a long-term financial plan.