Riding the institutional: the secret to investing in new issues

Traders see the current wave of IPOs as a rare opportunity to profit from the artificial intelligence boom that has pushed leading stock indexes to new highs. However, history shows that dealing with companies that have just gone public tests the patience and determination of even the most optimistic investors.

A study conducted by Yves Bobuch, Kathy Donnelly, Eric Carroll and Kurt Dale, and published in the book “The Lifecycle Trade”, found that more than 90% of IPOs trade at some point below the low recorded on their first trading day. Even when the stock recovers later, the process may take a long time.

This is why it is recommended to wait a few days or weeks until the formation of a “stabilization period” after the issue, whether the price of the stock jumps or falls. This is a period that occurs during the first 25 trading days, when the stock price stabilizes and trades in a narrow price range.

You can think of the period as a technical rest stop. It allows the initial volatility in the stock to moderate, while institutional investors accumulate shares and establish a potential price floor.

This pattern usually develops within two to five weeks, but sometimes it forms as early as seven days. The consolidation period usually begins after the stock price stabilizes and reaches a peak. The peak point, or the initial peak, appears at some stage after the start of trading in the stock. The key is to look for signs of price stabilization.

After the stock reaches that initial peak, its price sometimes falls for a period of time before rising again, to a level that may be of interest to investors considering a purchase. This decrease, known as a “pullback” within the post-IPO consolidation period, is usually moderate. Usually the stock does not fall more than 20% from its initial peak during this period, but during periods of high volatility in the markets, the decline may deepen up to 50% before the stock rises again.

Only when it climbs above the initial peak that started the consolidation period, the stock reaches a “buy point”, where its performance and market conditions create an optimal investment opportunity.

Many investors make the mistake of assuming that they should “buy low and sell high”, when this approach may even be too risky. Patterns like the “establishment period” force the stock to prove itself before the investor takes action. History shows that the most successful stocks often post significant gains after breaking out of a consolidation period. In other words, buying a quality stock at a high price may often lead to selling it at a much higher price.

The established example of Google

A study conducted by Mike Webster, senior market strategist at Investor’s Business Daily, shows that the most successful ‘breakouts’ from an establishment period have two key characteristics: a sharp jump in the stock price in one trading day and high trading volumes. This combination indicates a strong demand in the market and confirms that large institutional bodies are working to raise the share price.

The IPO of Google in 2004 (now Alphabet), provides a classic example of a post-IPO consolidation period. After the stock began trading on August 19 of the same year at a price of $85, its price stabilized almost immediately around $100; The consolidation period began when the stock hit a high of $113.48 on its third trading day.

After that the price began to fall but in a “moderate” way – only 13% from the peak, before rising again. During the pullback period the stock fell slightly below the issue price, but trading volumes decreased as the price fell, a positive sign that investors were in no rush to sell their holdings. The establishment period itself was also relatively short – only 15 trading days.

Investors did not have to wait long until the formation of the establishment period, and the reward that followed it. The stock reached the buy point on September 15, accompanied by high trading volumes. It then jumped sharply and recorded eight consecutive weeks of gains, before entering another consolidation period in November. By then the investors had already accumulated a return of 78%.

A more recent example is CoreWeave, an artificial intelligence infrastructure provider, which broke out of a five-week consolidation period after its IPO on May 14, 2025. The company’s stock nearly tripled in value in less than three months. The consolidation period included a sharp correction of 48%, from the peak of $64.82 to the low of $33.52 recorded during it, but at the time the entire stock market was in the midst of a sharp correction.

But not every consolidation period after an IPO ends successfully. For example, Spotify issued on April 3, 2018 – the stock quickly began to trade in a price range that included a buy point of $169.10, but the breakout did not materialize. Purchases by institutional investors faltered, and the stock struggled to gain momentum. By December of that year the stock had fallen by almost 50% from its peak of $198.99.

Like many other IPOs, Spotify also struggled in the first years after the IPO, and at the end of 2022 it even fell below its IPO price. The stock later recovered and began a sharp upward journey the following year. In the middle of 2025, the stock reached a peak of $785, but since then it has stabilized in the range of about $500.

Identify the entry point

Companies that have been issued tend to be highly volatile, because they do not have a long history of business and financial performance on the basis of which investors can assess their growth potential.

Although the consolidation period provides a good entry point that may help avoid the initial volatility, there are several other positive technical signs that investors can look for that may improve their chances of success.

To avoid the trap of a failed hack, like that of Spotify, it is recommended to examine the following points:
■ Does the stock manage to stay above the issue price during the consolidation period? If its price falls below this level, this may be a warning sign that institutional investors are selling their holdings.

■ The stock must consistently close in the upper half of its weekly trading range. This indicates the continued existence of demand.

■ During the consolidation period trading volumes should be lower than those recorded when the stock reached its initial peak. This is a sign that the selling pressure has exhausted itself before the start of the next price move.

So the consolidation period after the IPO gives investors a significant advantage in terms of timing, when it allows identifying a stable entry point, while taking advantage of the momentum that institutional investors create. Along the way, it also helps to protect the capital against initial declines in the stock.