IPO Trading: How to Trade New Listings

Initial Public Offerings (IPOs) create unique trading opportunities when private companies go public for the first time. IPOs can offer explosive gains but also carry significant risks. Understanding how the IPO process works and how to trade these new listings can help you navigate this exciting corner of the market.

What is an IPO?

An IPO is when a private company offers shares to the public for the first time. The company works with investment banks (underwriters) to determine the offering price and sell shares to institutional and retail investors. Once the IPO is complete, shares begin trading on a stock exchange.

The IPO Process

Understanding the IPO timeline helps you anticipate trading opportunities:

• S-1 Filing: Company files registration with SEC, revealing financials
• Roadshow: Management presents to institutional investors
• Price Range: Underwriters set an expected price range
• Pricing: Final IPO price set the night before listing
• First Trade: Stock opens for trading, often hours after market opens
• Lock-up Period: Insiders cannot sell for 90-180 days

Who Gets IPO Shares?

IPO shares at the offering price primarily go to:

• Institutional investors (hedge funds, mutual funds)
• High-net-worth clients of the underwriting banks
• Some retail investors through participating brokers

Most retail traders buy on the secondary market after trading begins, often at prices significantly above the IPO price.

IPO Day Trading Strategies

Wait for the Open

IPOs often do not open for trading until 10:30 AM or later on their first day. The underwriters work to find the opening price based on order flow. Do not place market orders before the open - you could get filled at an unexpected price.

The First 30 Minutes

IPO first trades are extremely volatile. The stock can swing 10-20% in minutes. Many experienced traders wait for initial volatility to settle before entering. Look for the stock to establish a range before trading.

VWAP Trading

Once the IPO establishes some trading history, VWAP (Volume Weighted Average Price) becomes a useful reference. Institutions often buy at VWAP, so the stock may find support there.

Post-IPO Trading Strategies

The First Few Days

Many IPOs are volatile for the first week as the market discovers fair value. Wait for technical patterns to develop before establishing positions.

First Earnings Report

The first earnings report after an IPO is crucial. It is the first time public investors see how the company performs quarter-over-quarter. Expect significant volatility around this event.

Lock-up Expiration

When the lock-up period expires (typically 90-180 days after IPO), insiders can sell their shares. This often creates selling pressure and can be a good time to enter short positions or avoid the stock.

Evaluating IPO Opportunities

Read the S-1

The S-1 filing contains crucial information:

• Revenue and growth trends
• Profitability (or path to profitability)
• Competitive landscape
• Risk factors (company must disclose these)
• Use of proceeds from the IPO
• Insider ownership and selling

Valuation

Compare the IPO valuation to public competitors. Is the company being priced at a premium or discount? Extremely high valuations increase downside risk.

Underwriter Quality

Top-tier investment banks (Goldman Sachs, Morgan Stanley, JPMorgan) typically underwrite higher-quality IPOs. While not a guarantee of success, it suggests the company has passed significant due diligence.

Hot vs. Cold IPO Markets

Hot IPO Market

In bull markets, IPOs tend to perform well:

• Large first-day pops are common
• More companies come to market
• Speculation drives prices higher
• Greater risk of overvaluation

Cold IPO Market

In bear markets or uncertain times:

• Many IPOs are delayed or canceled
• First-day pops are smaller or negative
• Better valuations for buyers
• Quality matters more than hype

SPACs: An Alternative Path

Special Purpose Acquisition Companies (SPACs) offer another way companies go public. A SPAC raises money through an IPO, then merges with a private company. Trading dynamics differ from traditional IPOs:

• Stock trades near $10 before merger announcement
• Can spike on merger news
• Often falls after merger completes
• Different risk profile than traditional IPOs

Options on New IPOs

Options are not immediately available on newly listed stocks. Exchanges typically wait 3-5 trading days before listing options. When options do become available:

• Implied volatility is extremely high
• Bid-ask spreads are wide
• Premium selling can be attractive but risky
• Start with small positions

Common Mistakes to Avoid

• Chasing the open: Do not market buy at any price - you may get a terrible fill
• FOMO trading: Missing one IPO is not the end of the world
• Ignoring lock-up dates: Mark these on your calendar for stocks you own
• Skipping the S-1: Know what you are buying
• Oversizing: IPOs are volatile - smaller positions are wiser
• No stop loss: Define your risk before entering

IPO Trading Checklist

• Read the S-1 filing for financials and risk factors
• Note the IPO price and expected opening price range
• Know the lock-up expiration date
• Wait for the stock to open before placing orders
• Let initial volatility settle (first 30+ minutes)
• Use limit orders only - never market orders
• Start with a smaller position than normal
• Set a stop loss immediately
• Watch for the first earnings report as a major catalyst
• Monitor lock-up expiration for potential selling pressure

Summary

IPO trading offers exciting opportunities but requires extra caution due to limited history and high volatility. Read the S-1, understand the valuation, and wait for the stock to open before trading. Avoid chasing first-day pops and be aware of lock-up expiration dates. Start with smaller positions and use strict risk management. The best IPO trades often come days or weeks after the initial listing when the dust has settled and technical patterns have developed.

Learn more: trading volatile markets and creating a trading plan.