Trend: Companies give retail investors access to IPO stock
As part of its plans to go public, Robinhood is considering allocating up to 35% of its IPO shares to retail investors. These types of announcements show a trend emerging — greater access to IPOs by investors. See: What is an initial public offering — IPO?.
How IPOs worked before: When a company goes public, institutional investors — those that invest on behalf of clients, and wealthy individuals are allocated the majority of a company’s IPO shares.
- These trading apps often give preferential rights to specific customers — i.e. those that trade more or have more money in their accounts.
- Traditionally, companies prefer to sell their stock to institutional investors, which tend to hold for a longer time — creating less volatility in stock prices.
In the news, you’ll often see “X companies jump Y% on IPO debut”. Known as the “IPO pop”, only those that bought into the IPO before it hit the market get to see this big gain. This leaves retail investors buying overpriced stocks.
That’s changing: Companies like SoFi (NASDAQ:SOFI), Robinhood and Public are opening up access to these IPO shares.
- In May, Figs (NYSE:FIGS), an online retailer for medical apparel, was the first IPO made available to retail investors on Robinhood — its stock doubled since going public.
- Duolingo, the language educational app, is planning on allocating a portion of its IPO shares for retail investors.
But be careful: According to business professor, Susan Chaplinsky, companies in higher demand could be allocated to institutional investors first — leaving retail investors with less desirable ones.
And in many cases, stonks don’t always go up when they IPO.