Should You Buy IPO Stocks? Why the "Ground Floor" Is Often the Exit

SpaceX has reportedly filed a confidential S-1 targeting a $1.75-trillion-or-higher valuation; OpenAI, Anthropic, and Databricks have all been linked to potential IPO plans in the next 12-24 months. The next 18 months will likely include several of the largest IPOs in history. The retail-investor question is the same one it has always been: should you buy these stocks at IPO?

For most individual investors, the answer is no. Not because every IPO is bad, but because the best economics are usually captured before the stock reaches ordinary public buyers. Founders, employees, venture investors, late-stage private investors, underwriters’ preferred clients, and large institutions typically allocate at the offer price. By the time most retail investors can buy meaningfully, they are buying in the open market after the first-day pop has already happened. The cleanest framing:

An IPO is not usually the “ground floor.” It is often the liquidity event.

The two different “IPO investing” experiences

Most retail content uses “IPO investing” as if it were one decision. It is not. Two completely different products are being labeled the same way.

The SEC’s investor bulletin says this directly: underwriters commonly distribute most IPO shares to institutional and high-net-worth clients, while typical individual investors more commonly buy shares after they are resold in the public market. The SEC also calls IPOs “risky and speculative investments.”¹

That distinction explains the paradox readers often notice: IPOs often pop on day one, and yet retail investors often lose money on them. Both can be true at once. The pop helps the allocated buyer. The aftermarket buyer often pays for it.

What the academic evidence says

Jay Ritter at the University of Florida maintains the most cited IPO statistics dataset, with returns broken out from both the offer price and the first-day closing price. Across 9,253 operating-company IPOs from 1980 through 2024, the average first-day return was about 18.8%. Measured from the offer price, the average 3-year buy-and-hold return was around +36% (about -3% market-adjusted). Measured from the first closing market price, the average 3-year return was around +19% but about -20% market-adjusted.²

That is the whole story in one sentence: the first-day pop helps the allocated buyer; the aftermarket buyer often pays for it.

The tech IPO subset is even more relevant for the SpaceX/OpenAI/Anthropic/Databricks-style hype that this guide addresses. Tech IPOs from 1980-2024 had higher average first-day returns (around 31%), but post-IPO market-adjusted returns from the first close were materially negative on average. Recent cohorts make the pattern brutally clear: IPOs from the 2020 and 2021 cohorts had first-day pops in the 32-42% range and 3-year market-adjusted returns deeply negative (the 2020 cohort lost roughly half its value over three years; 2021 lost about as much).²

Diversified IPO ETFs do not solve the problem either. The Renaissance IPO ETF has materially underperformed the S&P 500 since its 2013 inception, with cumulative returns roughly a third of the index over the same period. Past performance is not a forecast, but the persistence is striking and consistent with the academic IPO literature.³

Dimensional’s IPO research, looking at 6,362 U.S. IPOs from 1991-2018, reaches a similar conclusion: IPOs underperformed industry benchmarks in the first year on average, and much of the underperformance was explained by known expected-return drivers (smaller, less profitable, higher-relative-price companies). Dimensional also flags that first-day returns may not be accessible to most investors because they require allocation from underwriters.⁴

Why retail cannot get the offer-price allocation

Underwriters control the IPO book and distribute shares to clients with broker relationships. The SEC notes that this is standard practice. For a hot IPO, allocations are scarce; the attractive shares are rationed. For a cold IPO, allocations are abundant. That asymmetry is the classic adverse-selection problem: when retail does receive a full allocation in a hot deal, the right question to ask is “why was this available to me?”

The mechanical answer is usually that the IPO was less hot than underwriters feared, or that informed buyers passed. Either way, the allocations retail does get are skewed toward deals with weaker subsequent performance. Empirical studies of allocation outcomes have documented this winner’s curse pattern for decades.

The structural disadvantages for retail IPO buyers

• Adverse selection on allocations. Hot deals are rationed; cold deals are not. Retail buyers face the worse half of the distribution.
• Paying for the pop. The first-day pop is real economic value transferred from the company to the allocated buyer. Aftermarket buyers receive none of it; they often pay it.
• Sellers’ bargaining power. Companies tend to go public when market conditions are receptive. Founders, employees, VC funds, and PE funds want liquidity. The public buyer is buying from sophisticated sellers during a favorable narrative window.
• Limited float can create artificial scarcity. A mega-company can sell only a small percentage of itself. Limited public float creates price pressure and headline excitement without meaning the public buyer owns a bargain.
• Index inclusion as part of the pricing game. Faster index inclusion creates predictable demand. If insiders and underwriters know index funds may buy soon, that becomes part of the IPO pricing narrative. More on this in the next two sections.
• Limited public reporting history. The SEC notes that a new public company typically has no prior reporting history; the prospectus is the main source of investment information. Emerging growth companies may provide less disclosure than larger seasoned issuers.¹
• Dual-class governance. The SEC warns that super-voting structures can make it difficult or impossible for public shareholders to influence corporate matters. Many founder-led mega-IPOs use these structures.¹
• Pre-IPO platform risk. Pre-IPO funds add illiquidity, opaque markups, custody uncertainty, accreditation rules, and documented fraud risk. More in the dedicated section below.

Mega-IPOs and float-adjusted index weight

One question that keeps appearing in retail discussion: if SpaceX is “worth” $1.75 trillion privately, will my Vanguard Total Stock Market ETF (VTI) suddenly have huge SpaceX exposure the day it goes public? The answer is generally no, and the reason matters.

CRSP’s U.S. Total Market Index (which underlies VTI) is weighted by free-float market cap, not total company valuation. Free-float weighting only counts shares actually available to public investors.⁵ If SpaceX floats $75 billion of stock at a $1.75T headline valuation, the index weight should be based on the $75B investable float, not the $1.75T full-company value.

That is an important clarification because it kills two related misconceptions. First: holding VTI does not mean automatically buying $1.75T of SpaceX exposure on IPO day. Second: there is no urgent need for index investors to front-run inclusion by buying the IPO directly, because the post-inclusion exposure is much smaller than the headline number suggests.

Index providers are reconsidering inclusion rules ahead of the mega-IPO wave. Reuters has reported that Morningstar is considering changes to CRSP Market Indexes, that Nasdaq has adopted new fast-entry rules and revised the float-weighting methodology for low-float new listings, and that FTSE Russell has consulted on a fast-entry mechanism with potential changes to minimum-float and voting-rights requirements.⁶⁷⁸ The popular framing of these changes is “index providers helping IPO insiders.” The more balanced version is that faster, more predictable inclusion may help issuers and create post-IPO demand that index funds satisfy mechanically. That creates implementation cost.

The IPO shadow tax for index investors

New academic work has begun to quantify the cost of mechanical index buying around IPOs. A 2026 paper in the Review of Asset Pricing Studies finds that mechanical buying by CRSP-tracking funds five days after IPO affects returns and deal structure. Fast-track IPOs outperform comparable non-fast-track IPOs by more than five percentage points around the index inclusion date, then significantly revert within three weeks. The authors estimate a $5.8 billion “shadow tax” paid to intermediaries by index fund investors and IPO issuers.⁹

Sammon and Shim’s work goes broader. They argue that value-weighted indexes must rebalance in response to IPOs, secondary issuance, buybacks, and other changes in market composition. In doing so, index funds implicitly engage in market timing. They estimate a 47-70 bps annual index-level performance drag from these trades versus delayed-rebalancing alternatives.¹⁰

The conclusion is not that index funds are broken. They are excellent vehicles. The conclusion is that an index fund’s job is to represent the investable public market, not to optimize expected return. IPO inclusion is one of the known structural imperfections, and it has a measurable cost. Sophisticated systematic managers (Dimensional, Avantis) handle IPOs differently, with their own tracking-error costs as the price.⁴

Run the math on a specific IPO

Most retail content asks “will this stock go up?” The more useful question is: how much growth and multiple expansion does the IPO valuation require to give you a market-beating return after the first-day pop you bought into? At a $1.75T valuation with $18.6B of revenue, the company already trades at roughly 94x sales. To beat the S&P 500 from there, the math has to work very hard.

Who IPO investing might fit

• Institutional investors with allocation access. Research teams, portfolio discipline, the ability to participate at the offer price, and the diversification to absorb individual deal disappointments.
• Investors with a genuine analytical edge. Industry-specific operators who can read the S-1, model unit economics, evaluate dilution, and compare valuation to public comps with high confidence.
• Employees managing concentrated equity exposure. For them, the question is usually diversification and tax planning, not adding to the position. See concentration risk and equity compensation.
• Individuals using a tiny speculative sleeve. IPO buying as entertainment or speculation, not core retirement investing. A reasonable cap: no more than 1-2% of portfolio per IPO and no more than 5% total in single-stock or speculative positions.

Who should avoid IPO chasing

• Retirement investors seeking reliable expected returns. The evidence does not support IPO chasing as a dependable long-term strategy.
• Investors already concentrated in tech or employer stock. A tech worker with RSU-heavy compensation buying high-beta AI/space/software IPOs increases career, income, and portfolio correlation. See human capital risk for tech workers and the tech bro portfolio.
• Anyone buying because “this company will change the world.” A company can be transformative and still be a poor stock at the wrong price. The IPO calculator above is the test.
• Investors who cannot tolerate 50-80% drawdowns. Many post-IPO growth stocks experience brutal repricing when growth expectations reset.
• Anyone using pre-IPO platforms without diligencing the vehicle. The next section covers why.

The pre-IPO scam landscape

As mega-companies stay private longer, demand for pre-IPO access has grown. So has fraud risk. The SEC’s pre-IPO investor alert warns that pre-IPO scam offerings often promise access to “ground floor” opportunities and that investors may lose their entire investment, the company may never go public, a resale market may never develop, and many broad public solicitations for pre-IPO shares may be illegal.¹¹

FINRA’s 2026 oversight report flags potentially fraudulent activity in pre-IPO funds, including misrepresentations about compensation and failures to verify access to the shares purportedly held.¹² A recent case study: in December 2025, prosecutors charged a New York investment manager with allegedly defrauding investors in a sham pre-IPO scheme tied to drone-maker Anduril Industries. Reuters reported that the manager allegedly promised “economic exposure” to non-public Anduril shares despite having no access to them. Anduril’s own statement: “Any offer to invest in Anduril that does not come from or through Anduril is very likely a scam.”¹³

The pattern matters as the SpaceX/OpenAI/Anthropic/Databricks cycle approaches. Pre-IPO access is not automatically better access. It can mean high fees, opaque SPVs, uncertain custody, illiquidity, accreditation hurdles, and outright fraud.

Different systematic managers handle IPOs differently

For investors who want a systematic approach without abandoning broad market exposure, there is more than one defensible answer. Dimensional has historically delayed including newly listed companies in its funds, citing the documented IPO underperformance and the difficulty of accessing first-day returns.⁴ Avantis appears more willing to include newly listed companies when the company has enough financial information and attractive expected-return characteristics. Each approach creates tracking error against a plain market-cap index. None is free.

For most index investors, the simpler answer is to hold a broad-market fund and accept the small structural IPO cost as the price of representation. The shadow-tax math (Sammon-Shim 47-70 bps; the 2026 RAPS estimate of $5.8B) is real, but a globally diversified index portfolio still dominates most active alternatives after fees, taxes, and behavior.

Frequently asked questions

If SpaceX IPOs at $1.75T, how much will my VTI position own?

Probably much less than the headline number suggests. CRSP’s U.S. Total Market Index is float-adjusted, so the index weight is based on shares actually available to public investors, not the full company valuation. If SpaceX floats roughly $75B of stock at a $1.75T headline, the post-inclusion VTI weight is based on the $75B float. For a $100,000 VTI position, that translates to a few hundred dollars of SpaceX exposure, not tens of thousands.⁵

Should I just buy on day one because everyone says it will pop?

Buying after the first-day pop puts you in the worst category in Ritter’s data: aftermarket buyers, whose 3-year market-adjusted returns averaged about -20% across the 1980-2024 sample.² The pop is the underwriter rewarding allocated clients. It is not a return source for retail buyers who chase it.

What about buying after the lockup expires?

Six-month lockup expirations often create concentrated selling pressure as employees and early investors gain liquidity. That can mean a better entry price, or it can mean a falling-knife pattern. It varies by company. The bigger point is that valuation discipline matters at any entry point; lockup expiration alone is not a predictable edge.

Could I be wrong? Could SpaceX actually be a great IPO?

Yes. Some IPOs do beat the market by wide margins. The price you pay constrains the return you can earn. A great company at a heroic price is often a poor stock; a mediocre company at a fair price is often a fine one. Use the calculator above to see how much growth your specific entry price requires.

Should I avoid VTI because of the SpaceX inclusion?

No. The shadow-tax cost of IPO inclusion is small relative to the long-run benefit of broad, low-cost diversification. A globally diversified index portfolio remains the right default for most households. If the SpaceX inclusion bothers you, the appropriate response is to size your position so the marginal exposure is comfortable, not to abandon market-cap indexing.

What about pre-IPO platforms like EquityZen or Forge?

These are accredited-investor platforms that broker secondary trades in private company shares. They are different from the outright fraud the SEC and FINRA warn about, but they still carry meaningful risk: high markups over the most recent funding round, uncertain liquidity, custody and SPV-structure complexity, and accreditation hurdles. Treat any pre-IPO position the way you would treat a private fund investment, with full due diligence.

Related guides

• Most Stocks Lose to T-Bills covers the Bessembinder skewness evidence: 4% of stocks drove all market wealth. The IPO-specific application is the same: most newly public stocks underperform the market in the aftermarket.
• Concentration Risk covers single-stock and sector concentration math. An IPO position is a special case of concentration that often comes with adverse selection on top.
• The Tech Bro Portfolio covers ticker-count vs real diversification. An AI-IPO buyer is often already a tech-mega-cap-overweight buyer.
• Human Capital Risk for Tech Workers covers tech-worker income correlation. Tech employees buying tech IPOs compound correlated bets across employer, salary, and portfolio.
• Passive Investing Is a Label, Not a Description covers the discretion built into index methodology. The IPO inclusion mechanics here are one example of the larger point.
• Robinhood’s Agentic Trading looks at the same “get in early on hot trades” impulse when an AI agent is the one placing the orders.

Sources

1. U.S. Securities and Exchange Commission. Investor Bulletin: Investing in an IPO. Allocation rationing, first-day pop framing, dual-class governance warnings, limited public reporting history.
2. Ritter, J. R. Initial Public Offerings: Updated Statistics. University of Florida. 9,253 operating-company IPOs from 1980-2024; ~18.8% average first-day return; offer-price 3-year market-adjusted return ~-3%; first-close 3-year market-adjusted return ~-20%. Numbers update annually; verify at the source for the most recent vintage.
3. Renaissance Capital. Renaissance IPO ETF. Since 2013 inception, total return has materially lagged the S&P 500. Verify current factsheet figures at publication.
4. Dimensional Fund Advisors. “IPOs: Profiles Are High. What About Returns?” 1991-2018 study of 6,362 U.S. IPOs; first-year underperformance largely explained by known expected-return drivers; first-day returns require underwriter allocation.
5. Center for Research in Security Prices. CRSP U.S. Total Market Index methodology. Free-float market-cap weighted; the index underlying VTI is weighted by tradable shares, not full company valuation.
6. Reuters (April 2026). “Morningstar considers revamping index construction ahead of SpaceX IPO.” CRSP/Morningstar reviewing methodology for very large new listings.
7. Reuters (March 2026). “New Nasdaq rules to include ‘fast entry’ for new listings on benchmark index.” Nasdaq-100 fast-entry rule and revised float-weighting for low-float new listings.
8. Reuters (February 2026). “FTSE Russell proposes fast-entry rule for its US indexes ahead of mega-IPOs.” FTSE consultation on fast-entry mechanism.
9. “Primary Capital Market Transactions and Index Funds” (2026). Review of Asset Pricing Studies, raaf013. Estimated $5.8 billion shadow tax to intermediaries from mechanical post-IPO buying by CRSP-tracking funds.
10. Sammon, M. & Shim, J. “Index Rebalancing and Stock Market Composition: Do Indexes Time the Market?” SSRN 5080459. Estimated 47-70 bps annual index-level performance drag from mechanical rebalancing in response to IPOs, issuance, and buybacks.
11. U.S. Securities and Exchange Commission. “Pre-IPO Investment Scams — Investor Alert.” Warnings about “ground floor” pre-IPO solicitations and the risk of total loss.
12. FINRA. 2026 Annual Regulatory Oversight Report — Private Placements. Pre-IPO fund fraud flags, including misrepresentations about compensation and failures to verify share access.
13. Reuters (December 2025). “US investment manager charged with Anduril pre-IPO fraud.” Sestante Capital case study; Anduril’s own statement that any pre-IPO offer not coming from or through Anduril is very likely a scam.