What happened

Shares of insurance company Lemonade (LMND 5.27%) fell a painful 13% on Wednesday after less than one week on the public markets. What could have possibly happened to crash this stock?

In fact, nothing happened with Lemonade today. Stocks tend to be volatile after an initial public offering (IPO), not necessarily because of news. After an IPO, companies are subject to a quiet period. So don't expect any news from Lemonade in July. Nevertheless, it will probably be a bumpy ride.

A confused woman shrugs her shoulders against a yellow background.

Image source: Getty Images.

So what

IPO stocks tend to be extremely volatile, especially in the first couple of months. Some days, the stock might soar. Indeed, Lemonade stock is still up a mind-blowing 135% from its IPO price of $29 per share. Other days, like today, it can fall back down for no apparent reason.

This underscores an important principle for investors. One must buy shares prepared to hold for the long term while a bullish thesis plays out. When a stock falls, instinct motivates us to sell. But selling as a stock goes down locks in losses. Rather, if the long-term thesis is still intact, investors need to be prepared to hold or even add more shares. 

If volatility is difficult for you, maybe investing in IPO stocks like Lemonade isn't for you. Better to wait for at least a few months while the stock stabilizes. After all, if it's a solid stock, it'll still be there by the time you're ready to invest.

Now what

Having a strong bullish conviction on a stock can only come from a good understanding of its business. For Lemonade investors, that knowledge comes from the company's prospectus. And I'd be willing to wager most haven't read it, giving an advantage to investors who have.

Lemonade points out in the prospectus that its top competitors each generate over $100 billion in annual revenue, and yet none of these have significant market share. Some of these competitors are over 100 years old, while Lemonade only launched in 2016. With a massive addressable market currently being serviced by aging competitors, perhaps Lemonade is indeed the fresh face poised to disrupt the industry through its technology platform and reward shareholders in the process. 

I choose to wait for volatility to subside with IPOs like Lemonade. But I'll definitely be using the next few months to get to know this company better.