How to buy I.P.O.s
Initial Public Offerings or I.P.O.s are arguably the heart blood of the stock market. Here's why.
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What we know of as the stock market is the secondary market. Financings in companies prior to listing on an exchange are considered to be the primary market. It's not necessary to know the terminology on this, but recognize I.P.O.'s almost always have a financing associated with them.
Raising money is what makes the stock market go around!
In their 2025 I.P.O. Medline raised $6.3B. The financing was done at $29/share with 219 million shares issued. On the stock's first day of trading MDLN jumped 41% to close at $41/share.
The 219 million shares issued is added to the total number of shares outstanding.
In this case, investors who participated in the financing saw their holding jump by 41% on the first day of trading. Other I.P.O. investors however aren't always so fortunate.
Historically, there are more I.P.O.s when the stock market has been trending higher for a prolonged period of time. Investor appetite is higher in this situation, allowing for more I.P.O.'s and more profitable financings for the issuer, like Medline.
The higher stock prices are the less the dilution on a financing is. For example XYZ Company, a manufacturer of time machines, did a raise when the stock was trading at $30/share. They raised $100M which means they issued 3.33M shares. Several years later, they did another financing for $100M when the stock was $50/share. At $50/share only 2 million shares needed to be issued.
It is the investment banking syndicates job to establish a financing price that raises the amount of money the company seeks. There is an argument that if the stock trades substantially above the financing price, they set the price too low leading to a more significant dilution of the capital structure.
I.P.O.'s, or new issues as they are often referred to, are important for more than the financing they provide. New entrants to the stock market makes the stock market more interesting with new possibilities and opportunities for institutional and retail investors.
I.P.O.s as an Indicator
Successful I.P.O.s is a sign the stock market is healthy. When the stock market is doing well I.P.O.s tend to out perform most stocks. Intuitively this makes sense as there will be a higher concentration of I.P.O.s in companies in new and expanding industries.
But when the stock market is trending lower I.P.O.s tend to amongst the worst performing stocks. Money that went into the these companies often cashes in and the pendulum swings from the initial heavy buying to the other extreme. This has been evident in history.
Following the Dot Com bubble of the late 90's, the internet sector fell by 95%. The internet was here to stay, but the investment cycle had shifted and money was moving out.
I.P.O.s highlight the importance of timing. The cannabis or marijuana sector had its share of waves higher but the biggest gains occurred before marijuana was legalized. The I.P.O. phenomena is a prime example of how the stock market is the crystal ball into what is happening in the economy.
How to buy I.P.O.s
Once an I.P.O. is trading there is more than one strategy on how to participate in the stock. But there is something critical to recognize with I.P.O.s and that is they have no history.
I.P.O.s are all about hype. Nobody talks about anything negative with the company or the financing because the issuer and the investment dealers distributing the financing are selling the story. Everything is rosy and investors are falling for it.
If the stock is rising in the initial days of trading one strategy is to buy in as long as the stock is rising. This can work as there may be a huge early surge in buying. However, when the heavy buying ends and when investors decide to sell is unknown. The stock may be strong short term but could easily go into decline as investors take profits. The drop from the peak could be enormous and it could be in one session.