Key Takeout
- Retail investors can now access IPO stocks early, thanks to brokerage firms like Robinhood and SOFI.
- Investors can express interest in future IPOs, with shares being randomly allocated from a larger pool.
- While it’s possible to sell shares on the first trading day, doing so may result in penalties from the companies involved.
It has become significantly easier for everyday investors to participate in IPOs. Online brokerages like Robinhood and Sofi have essentially opened the doors to anyone with an investment account. It’s kind of exciting, right? Just a bit of luck, and you might get in on a hot stock.
Historically, getting access to an IPO required a certain level of wealth—basically needing a net worth of over $1 million and an annual income exceeding $200,000, certified by the U.S. Securities and Exchange Commission. So, many retail investors usually had to wait until a company started trading publicly.
The IPO landscape has seen several notable companies in recent weeks, such as Klarna, Gemini, Stubhub, and Bullish. However, making a profit after purchasing shares can still prove to be a challenge.
Take Figma, for instance. This design software company launched its IPO in late July at $33 per share but opened trading at $85. It’s frustrating, really—many traders wish they had the chance to double their investment right at the start. Now, Figma’s shares are sitting around $56. Curious how those early investors are feeling seven weeks in, with fewer folks buying on the debut day?
How to Invest in an IPO
First off, you’ll need a valid account with a brokerage that grants IPO access, like Robinhood or SOFI. On these platforms, you can express interest in upcoming IPOs and indicate how many shares you want at the anticipated price. But keep in mind, Robinhood often predicts a price about 20% higher, just in case the IPO price gets revised up.
However, placing an order isn’t a guarantee you’ll actually get the shares. Brokerages only receive a limited allocation of IPO shares, which they then distribute randomly among interested investors. Both Robinhood and Sofi admit they can’t predict how many shares any underwriter will ultimately allocate.
Will it Sell Soon?
If you buy shares before an IPO, you might want to sell if the stock price jumps on the trading debut. But here’s the catch: brokerages have policies that can restrict this.
For example, Robinhood warns that if you sell within 30 days after an IPO, you could be locked out from future IPOs for 60 days.
Sofi’s rules are even stricter—a first offense might lead to a 180-day ban, and subsequent offenses could escalate that. Plus, they might charge you if you sell within 120 days after the IPO.
Important
It’s worth noting that stocks don’t always rally on their first trading day. Some even plunge below their IPO price shortly after. Always read the IPO prospectus with caution, especially if a company plans to use most of its funds to pay off its debts.
Interestingly, Robinhood has reported a fivefold increase in demand for IPOs since 2024, yet investors seem less inclined to sell right away.
A spokesperson for Robinhood mentioned it’s not all about the quick flip. There’s, perhaps, a genuine interest from retail investors who are sticking around for the long haul. It’s a different mindset.
Jay Ritter, a finance professor at the University of Florida, has pointed out that retail and institutional investors often behave differently. Retail investors, who usually invest in smaller amounts, can stabilize stock prices or even transform them into meme stocks.
“If an individual puts in an order for 2,000 shares but only gets 200, they’re likely to hang onto those,” he explained. “On the flip side, if an institution orders 20,000 shares and only receives 2,000, they might just sell them off quickly.”
How investors handle stocks can also depend on the industry, according to Ritter.
“For well-known companies, like those in gaming, retail investors can have a significant impact on stock prices and their movements,” he added.
Conclusion
Retail investors now have the opportunity to invest in companies before their IPOs, through brokers like Robinhood and Sofi. Investors can express interest and order desired shares, but whether they receive them is essentially a lottery, influenced by the brokerage’s allocation. Selling shares as soon as trading begins is an option—but it’s considered an “inversion,” and there could be consequences.
