The simple version

When a private company goes public, it sells shares to outside investors for the first time. That event, called an initial public offering or IPO, converts private ownership stakes into publicly traded stock that anyone with a brokerage account can eventually buy. In 2025, the U.S. averaged roughly 150 IPOs per year, according to SEC EDGAR registration data, and each one follows the same basic legal and financial process regardless of whether the company makes software, semiconductors, or sandwiches.

The reason this matters to your money is not about whether you buy the stock. It is about understanding what an IPO does, who benefits first, and what the hype cycle that surrounds these events tends to do to retail investors who arrive late. The companies that go public during a bull market in a hot sector are not inherently better businesses. They are businesses whose early investors decided the timing was right to sell.

The numbers

• A company filing for an IPO submits an S-1 registration statement to the SEC, which must disclose audited financials, risk factors, and how the company plans to use the proceeds (SEC.gov, EDGAR filing system).
• The SEC's review period for an S-1 typically runs 30 days for the first comment letter, though the full back-and-forth can take several months (SEC.gov).
• In a typical IPO, underwriting banks buy shares from the company at the offering price and resell them to institutional clients first. Retail investors access shares on the open market after trading begins (SEC.gov, investor education).
• The average first-day IPO return for 2021, the most recent peak year, was approximately 28%, but the median 3-year return after that cohort priced was negative, meaning most buyers who held after the open lost ground (SEC EDGAR, academic filings cited in registration documents).
• A company can also go public through a direct listing, which skips the underwriting process. Spotify and Palantir used direct listings in 2018 and 2020 respectively, according to their S-1 filings on SEC EDGAR (SEC.gov).
• Lock-up periods, typically 90 to 180 days after the IPO date, prevent insiders and early investors from selling shares immediately. After the lock-up expires, supply can increase sharply (SEC.gov, standard S-1 disclosure requirement).

How an IPO actually works, from S-1 to first trade

The process starts well before the ticker shows up on your phone. The company hires investment banks, called underwriters, to manage the offering. Those banks conduct a roadshow, meaning they pitch institutional buyers (pension funds, mutual funds, hedge funds) to gauge demand and set a price range. The final offering price is set the night before trading begins. Institutional buyers get shares at that price. Retail investors, meaning you, generally cannot buy at the offering price. You buy on the open market after the stock starts trading, which is almost always above the offering price on day one.

That gap, between where institutions buy and where retail buys, is structural. It is not fraud. It is how the system is designed. The underwriters are compensated partly by that spread. The company and its early investors benefit from strong first-day demand. Retail investors who chase the opening price are often buying after the institutional gain has already been captured.

After the IPO, the lock-up period matters more than most headlines acknowledge. When early employees and venture capital funds are legally allowed to sell, starting 90 to 180 days after the offering, they often do. That surge in supply frequently pushes the price down. Companies that went public at high valuations during the 2021 IPO wave saw exactly this pattern play out across 2022 and 2023, with many trading below their offering price within a year.

The product features a company releases right before an IPO, whether a new model, a new capability, or a new restriction policy, are also part of the pre-IPO narrative. Companies have strong incentives to generate favorable coverage in the months before pricing. That is not a conspiracy; it is a standard part of managing investor perception during a roadshow. Reading product news through that lens does not make you cynical. It makes you accurate.

The Real Cost lens on a $5,000 retail IPO investment

Suppose you put $5,000 into a high-profile tech IPO on day one, paying 20% above the offering price because that is where the stock opened. The question is not whether the company is good. The question is what the math looks like if the stock simply returns to the offering price within 18 months, which is what the median high-valuation IPO from the 2021 cohort did.

• Starting position: $5,000 at the open-market price, which is 20% above the $41.67 offering price, so your effective cost per share is $50.
• If the stock drifts back to the offering price of $41.67 within 18 months, your $5,000 is worth $4,167. That is a $833 loss, not counting any transaction costs.
• The same $5,000 invested in a broad index fund earning the historical average annual return of roughly 10% (S&P 500 long-run average, Federal Reserve FRED data, series SP500) would be worth approximately $5,756 after 18 months.
• The real cost of chasing the open: roughly $1,589 in opportunity cost relative to the index, before you account for any taxes on a loss or the emotional cost of watching a hyped stock underperform.

This math is not a prediction about any specific company. It is a frame. The question to ask before buying any IPO on day one is: am I buying a business at a fair price, or am I buying hype at a premium that institutional investors already captured? The answer is almost always the latter if you are buying in the first days of trading.

What this means

High-profile IPOs in hot sectors will continue to generate headlines that feel like urgency. The underlying mechanism does not change based on the sector. The company going public is converting private risk into public risk, and the people selling are the ones who took that private risk early. By the time a company is on your phone's news feed announcing a product launch ahead of a public offering, the early return has already been priced in.

Understanding the IPO structure does not tell you whether to buy a specific stock. It does tell you to ignore the product-launch coverage as investment signal, read the S-1 if you are seriously considering a position, watch the lock-up expiration date, and remember that institutional buyers set the offering price, not you. That knowledge does not require you to do anything. It just makes the hype cycle easier to ignore.

What this is NOT

This is not a prediction of where any AI company's stock will trade after its IPO. This is not a recommendation to buy, sell, or avoid any specific company's shares, including Anthropic or any competitor. This is not a statement about whether Anthropic, its models, or its product restrictions are good or bad for the industry. This is not advice on whether you should participate in any upcoming offering. This is not a buy or sell signal on any security, fund, ETF, or asset class.

Sources

• SEC EDGAR, IPO filings and S-1 registration guidance: https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&type=S-1&dateb=&owner=include&count=40
• SEC investor education, IPO basics: https://www.sec.gov
• Federal Reserve FRED, S&P 500 data series: https://fred.stlouisfed.org/series/SP500