What to Know About First-day IPO Stock Performance
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Unlike stock exchanges in the Middle East—like the Saudi Exchange, which saw 10 initial public offerings (IPOs) in the first 11 months of the 2021—companies are going public at a rapid pace in the US. Year to date, the US has had 424+ IPOs, with a strong mix of industries and companies a part of the pop.
When a company is new to the stock market, its shares can experience volatility as they try to find their bearings. From an IPO pop to whipsaw, here's what to know about first-day IPO stock performance.
Do IPOs usually go up on the first day?
According to Statista, first-day IPO stock performance does historically show returns. In 2020, when 471 companies (including blank-check holding companies) went public, the average first-day IPO gain was 36%. That broke the previous record in 2013 of 21%.
The rate of first-day IPO performance depends on economic factors. For example, IPOs averaged a 60% pop on day one of trading during the Dot-Com bubble in 2000. Not long after, the stock market crashed and many companies even shut down.
Even though the average gains for first-day IPOs look exciting, it's important to note that nearly a third of all IPOs decrease in value on day one of trading. This means the stock trades lower than its offer price before the market closes.
What is an IPO pop?
An IPO pop happens when a newly public company's stock increases in value when it debuts on the market.
In 2020, some of the biggest IPO pops were Doordash (NYSE:DASH), Airbnb (NASDAQ:ABNB), and Snowflake (NYSE:SNOW). All of these stocks increased in value during the transition of stocks from the company to the institutional investors and finally to the general public (aka retail investors).
First-day IPO volatility can contribute to a whipsaw
It's important to know that first-day gains don't always last. While a third of IPOs trade lower by day one, a full half of IPOs trade lower by day two. If the volatility is extreme, the stock may experience what's called a "whipsaw," or upward price movement followed by a sharp decline in value. The US stock market saw this in April 2021 when Coinbase (NYSE:COIN) went public.
If your brokerage doesn't allow day trading, you may not be able to sell until the next trading day—and you could be forced to sell at a loss or hold on until the stock (hopefully) increases in value again.
That doesn't always happen, which is why companies like Casper Sleep are going private after just a year and a half on the market.
The rundown on first-day IPO investing
The Renaissance IPO ETF (IPO) is a fund made up of newly public stocks. While it keeps companies on its holding list after the first day of trading, it's a good reflection of what the IPO market looks like.
IPOs do show volatility, but some traders can latch on to serious capital gains. For long-term investors, reserving a small percentage of your portfolio for IPOs may be a good way to experience the thrill of IPO investing with limited risk.
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