When you buy shares of a company during its Initial Public Offering (IPO), it’s crucial to remember who’s on the other side of that trade. You’re buying from company insiders—people who know every strength, weakness, and future prospect of the business. They might be selling because they believe the company’s best days are behind it, or they could just be cashing out to buy a private jet. Either way, you're starting with an information disadvantage.

This dynamic makes IPOs a fascinating corner of stock market investing. They can be a fantastic playground for seasoned traders, but for the average person looking to grow their wealth, the game has changed. Let's break down the two ways to approach them: as a short-term trade or a long-term investment.

The Trader’s Approach to IPOs

For traders, IPOs are attractive because of their unique structure. They often have high volatility due to a small "float" and strong initial institutional support. A small float simply means that only a small portion of the company's total shares are available for public trading right after the IPO. The rest are "locked up," meaning insiders can't sell them for at least six months.

With so few shares in circulation, it doesn’t take much buying or selling to cause huge price swings. This volatility cuts both ways.

• Lyft (LYFT) crashed quickly after its IPO. Only 32.5 million of its 273 million shares were available to trade—a tiny float of just 12%. When short-sellers targeted the stock, it plummeted from a high of $88.60 to the high $40s in a matter of days.
• PagerDuty (PD) saw the opposite effect. With a similar 12% float, it debuted in the high $30s and shot past $50 shortly after.

We’ve seen this pattern before with companies like GoPro (GPRO), which ran from $30 to nearly $100 before crashing, and Twitter (TWTR), which surged from $45 to $73 before falling back below its IPO price. These wild swings are what make specific trading strategies so effective.

One of the more effective trading strategies I’ve used involves patience. I’ll watch a recent IPO for a couple of weeks to see how it behaves. I look for the stock to settle into a tight price range with decreasing trading volume. When it finally breaks out of that range on a surge of new volume, I’ll often buy in, setting a trailing stop loss to protect myself. For example, I used a 15-day exponential moving average (EMA) as my stop. If the stock closes below that line, I’m out. Discipline is non-negotiable.

Another critical factor is the "lockup expiration." After 180 days, insiders are typically allowed to sell their shares. This flood of new supply can sometimes send the stock price tumbling, so it's a date every IPO trader should have on their calendar.

The Investor's Path to Wealth Accumulation

Approaching an IPO as a long-term investor is a completely different ballgame. The goal here is wealth accumulation over decades, not days. If you had bought a single share of Coca-Cola for $40 at its 1919 IPO and reinvested the dividends, you’d have over $15 million today. The same is true for early investors in Walmart, Starbucks, or Microsoft. This is the dream of stock market investing.

But for every success story, there’s a disaster like Webvan, the online grocer that went bankrupt just two years after its 1999 IPO, wiping out investors. The reality is that most companies don’t become the next Microsoft, so blindly buying every IPO is a recipe for disaster.

To succeed as a long-term IPO investor, you need two things: deep industry knowledge to correctly predict a company’s future and the nerve to hold on through brutal downturns. Even Coca-Cola stock fell 50% in its first year. Could you watch a $10,000 investment shrink to $5,000 and not sell? That's a fundamental question for anyone considering this path for their personal finance goals.

There’s also a new, significant hurdle. Companies are staying private much longer. Amazon was founded in 1994 and went public just three years later with a market cap of $438 million. By contrast, Uber was founded in 2009 but didn’t IPO until 2019, a full decade later, with a market cap over $80 billion. The bulk of the explosive growth now happens in the private markets, leaving public investors to fight over smaller gains. While Amazon's public shareholders saw a potential 2,052x return, it's hard to imagine Uber delivering a similar performance. For long-term wealth accumulation, buying a modern IPO often means you’re the last one to the party.

Ultimately, how you engage with an IPO depends entirely on your goals and expertise. For those with disciplined trading strategies, the volatility can be a source of profit. But for those focused on long-term personal finance and investing, the landscape has become far more challenging.