when a company decides to raise money via an ipo it is only after careful consideration and analysis that this particular exit strategy will maximize the returns of early investors and raise the most capital for the business therefore when the ipo decision is reached the prospects for future growth are likely to be high and many public investors will line up to get their hands on some shares for the first time ipos are usually discounted to ensure sales which makes them even more attractive especially when they generate a lot of buyers from the primary issuance 
initially the price of the ipo is usually set by the underwriters through their pre marketing process at its core the ipo price is based on the valuation of the company using fundamental techniques the most common technique used is discounted cash flow which is the net present value of the company s expected future cash flows underwriters and interested investors look at this value on a per share basis other methods that may be used for setting the price include equity value enterprise value comparable firm adjustments and more the underwriters do factor in demand but they also typically discount the price to ensure success on the ipo day it can be quite hard to analyze the fundamentals and technicals of an ipo issuance investors will watch news headlines but the main source for information should be the prospectus which is available as soon as the company files its s 1 registration 3 the prospectus provides a lot of useful information investors should pay special attention to the management team and their commentary as well as the quality of the underwriters and the specifics of the deal successful ipos will typically be supported by big investment banks that can promote a new issue well overall the road to an ipo is a very long one as such public investors building interest can follow developing headlines and other information along the way to help supplement their assessment of the best and potential offering price the pre marketing process typically includes demand from large private accredited investors and institutional investors which heavily influence the ipo s trading on its opening day investors in the public don t become involved until the final offering day all investors can participate but individual investors specifically must have trading access in place the most common way for an individual investor to get shares is to have an account with a brokerage platform that itself has received an allocation and wishes to share it with its clients performance of iposseveral factors may affect the return from an ipo which is often closely watched by investors some ipos may be overly hyped by investment banks which can lead to initial losses however the majority of ipos are known for gaining in short term trading as they become introduced to the public there are a few key considerations for ipo performance if you look at the charts following many ipos you ll notice that after a few months the stock takes a steep downturn this is often because of the expiration of the lock up period when a company goes public the underwriters make company insiders such as officials and employees sign a lock up agreement lock up agreements are legally binding contracts between the underwriters and insiders of the company prohibiting them from selling any shares of stock for a specified period the period can range anywhere from three to 24 months ninety days is the minimum period stated under rule 144 sec law but the lock up specified by the underwriters can last much longer 4 the problem is when lockups expire all the insiders are permitted to sell their stock the result is a rush of people trying to sell their stock to realize their profit this excess supply can put severe downward pressure on the stock price some investment banks include waiting periods in their offering terms this sets aside some shares for purchase after a specific period the price may increase if this allocation is bought by the underwriters and decrease if not flipping is the practice of reselling an ipo stock in the first few days to earn a quick profit it is common when the stock is discounted and soars on its first day of trading closely related to a traditional ipo is when an existing company spins off a part of the business as its standalone entity creating tracking stocks the rationale behind spin offs and the creation of tracking stocks is that in some cases individual divisions of a company can be worth more separately than as a whole for example if a division has high growth potential but large current losses within an otherwise slowly growing company it may be worthwhile to carve it out and keep the parent company as a large shareholder then let it raise additional capital from an ipo from an investor s perspective these can be interesting ipo opportunities in general a spin off of an existing company provides investors with a lot of information about the parent company and its stake in the divesting company more information available for potential investors is usually better than less so savvy investors may find good opportunities in this type of scenario spin offs can usually experience less initial volatility because investors have more awareness ipos are known for having volatile opening day returns that can attract investors looking to benefit from the discounts involved over the long term an ipo s price will settle into a steady value which can be followed by traditional stock price metrics like moving averages investors who like the ipo opportunity but may not want to take the individual stock risk may look into managed funds focused on ipo universes but also look out for so called hot ipos that could be more hype than anything else 