IPO (Initial Public Offering)

An IPO, or initial public offering, is when a private company offers its shares to the public for the first time. Before an IPO, the company is owned by founders, employees, and private investors. After the IPO, anyone with a brokerage account can buy and sell shares.

You’ve probably seen the headlines when a big company “goes public.” Shopify’s IPO in 2015 is a well-known Canadian example. The company listed on the TSX and NYSE, and investors who got in early saw enormous returns over the following years.

Why it matters

IPOs generate a lot of excitement, but that excitement can be misleading. The initial price is set by investment banks working with the company, and there’s often a big pop on the first day of trading as demand outpaces supply. That early surge can make it tempting to jump in.

But IPOs are risky for everyday investors. The company has no public track record to evaluate. The financial information available is limited compared to established public companies. And the hype around a new listing can push the price well above what the company is actually worth in the short term.

Many IPOs underperform the broader market in their first year or two. Some do incredibly well over time, but picking which ones will succeed is difficult.

Example

Shopify went public in May 2015 at $17 per share on the TSX. On its first day of trading, it jumped to around $28. Someone who bought at $28 and held through the volatility would have seen that share worth over $2,000 at its peak in late 2021. But many other Canadian IPOs from that same period are trading well below their listing price today. The outcome varies wildly.

If a newly public company interests you, there’s no rush. You can wait for a few quarters of public earnings reports, let the initial hype settle, and buy in once you have more information. The stock doesn’t disappear after day one.