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Investing in an IPO used to be reserved for an exclusive Wall Street club. Then digital brokerages like SoFi Securities started opening doors to everyday investors.

As exciting as this can be, there are unique risks and considerations when participating at the IPO stage. It can be harder to assess value when a company has a limited track record to go on, and once trading begins, share prices are notoriously unpredictable.

Plus, greater access doesn't mean open access. Securing IPO shares can still be a challenge for regular investors, especially when there's a lot of interest.

As Wall Street braces for not one, but three monumental IPOs — Elon Musk's SpaceX, and AI heavyweights Anthropic and OpenAI — there may be no better time to learn more about IPO investing. Here are five things to understand before the next big company rings the opening bell.

1. Buyers and sellers have competing interests

Companies go public for various reasons, including to increase their visibility, to raise money for expansion, or to make it easier to make acquisitions or incentivize employees. IPOs are also a common way for private equity investors and founders to cash out of their investments.

When an IPO is an exit strategy for early investors, it's important to remember that these investors may be getting their first opportunity to turn their stake into cash — and sellers inherently want to get the highest price. Similarly, the higher the IPO price, the more capital the company raises.

Meanwhile, the investment banks underwriting the IPO on behalf of the company are balancing these interests with market conditions and investor demand. If the price is too high, they may lose potential buyers.

In other words, the valuation process is opaque. As the Securities and Exchange Commission's (SEC's) Office of Investor Education and Advocacy puts it, there are "competing interests" affecting the offer price, which is determined by a "mix of market conditions, analysis and negotiation."

2. You'll want to read the prospectus, not the hype

You won't know whether you want to invest in an IPO without researching it. Every IPO requires an S-1 registration statement — a detailed filing submitted to the SEC and publicly available through the SEC's Edgar database here. The main component is what's known as the prospectus, which can be revised more than once during the registration process.

While these documents may not be thrilling reading, they contain critical information, including past financial statements, executive compensation, proposed use of the IPO proceeds, the competitive landscape, and risk factors.

It can be helpful to start with the risk factors, since these may help you to rule out some candidates quickly. Companies going public are legally required to spell out things that could go wrong, and sometimes these disclosures are surprisingly candid.

3. Expectations can play a big role in IPOs

The appeal of an IPO is undeniable. It's the opportunity to get in on what's potentially the next big thing ahead of other investors.

Blockbuster IPOs often make headlines for their dramatic first-day jumps. But others flop. Some can end up spending years below their IPO price.

An LPL Research analysis of IPOs between 1995 and 2025 found that many newly public companies struggle after going public. Compared to their closing price on the first day of trading, the median return over the first year was -4.7%, with more than half having negative returns.

IPOs can garner lots of attention, including on social media. A 2023 study by a University of Pittsburgh economics professor found that IPOs had a lower average return over the long run when the pre-IPO enthusiasm was high versus low. In other words, by the time later investors pile in, expectations may already be sky-high.

One more important wrinkle: There may be lockup agreements that prevent insiders and early investors from selling shares for a set period (typically 180 days) after an IPO. Once those lockups expire, a flood of additional shares can hit the market, sometimes putting downward pressure on the stock price. That's one reason some IPOs surge early, then stumble months later.

4. You're not guaranteed IPO shares

Most private companies use a group of underwriting banks and brokerages as go-betweens when they go public. The banks and brokers purchase the shares from the company and then sell them to institutional investors (mutual funds, pension funds), wealthy individuals, and in limited cases, regular investors.

Purchasing these shares is different from buying shares once trading starts. Typically you'll submit what's called an indication of interest (IOI) to the broker ahead of the IPO. It's nonbinding, and doesn't guarantee the final offer price or that you'll be allotted shares to purchase. Those decisions will depend on demand or other factors. Then, once the allocations are determined, investors who submitted IOIs are asked to confirm their requested shares.

(Some brokerages also impose eligibility requirements, such as minimum account balances. At SoFi, any member with an active investing account can submit an IOI on an available IPO.)

5. Put your financial goals first

IPOs are no longer the velvet-rope event they once were, but IPO investing still requires skepticism and homework. Before requesting shares of an IPO, look past the buzz to consider your time horizon, financial goals, and tolerance for risk. Investment decisions should reflect both your willingness and your ability to take risks.

Newly public companies can be unpredictable, and a spectacular business won't always be the right fit for your specific portfolio. Read the filings. Understand the business model. Pay attention to the valuation. And remember that excitement alone is never an investment thesis.

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

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Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of losing principal. Key risks include, but are not limited to, unproven management, significant company debt, and lack of operating history. For a comprehensive discussion of these risks, please refer to SoFi Securities' IPO Risk Disclosure Statement. This is not a recommendation and does not constitute an offer of any securities for sale. Investors must carefully read the offering prospectus to determine if an offering is consistent with their objectives, risk tolerance, and financial situation. New offerings often have high demand and limited shares. Many investors may receive no shares, and any allocations may be significantly smaller than the shares requested in their initial offer (Indication of Interest). For more information on the allocation process, please visit IPO Allocation.

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