In one of the most anticipated IPOs this year, Robinhood stock went public on Thursday.
However, the excitement surrounding the debut of the online trading platform as a stock corporation does not mean that investors should forego expert advice: proceed with caution when going public.
“There is the potential for high volatility in an IPO as the market determines the real value of the company,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York.
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Robinhood valued its stocks at $ 38, which was on the lower end of its target range.
His IPO differs from most of the others in that he has 20 to 35% of his shares reserved for his clients. The move is part of Robinhood’s effort to provide retail investors with better access to initial public offerings, which are typically more wealthy brokerage clients and institutional investors (i.e. mutual funds, hedge funds, foundations, etc.)
IPOs essentially involve private companies becoming publicly traded companies.
That is, company shares are sold to the public and can then be bought and sold on public exchanges such as the Nasdaq – where Robinhood is traded under the ticker symbol “HOOD” – or the New York Stock Exchange.
This year, according to Renaissance Capital, there have been 261 new listings so far, dwarfing the 218 initial public offerings in 2020. This year is the busiest for IPOs since 2014 when there were 275.
As a rule, smaller investors have to wait until the shares are traded on a stock exchange. And at that point, they may be paying more than those who got on earlier. The average first-day return on IPOs last year was 41.6%, according to data from IPO expert Jay Ritter, a finance professor at the University of Florida.
Whether it is Robinhood or any other newly listed company, however, there are a few things you should know before buying any stock.
For starters, this doesn’t mean you’ll get the amount you want, even if you can request shares early on, as was the case with Robinhood’s initial public offering. In general, the more demand there is for an IPO, the more difficult it is to get hold of your own shares.
There is very little predictability about long-term returns based on day one.
Jay Knight
Professor of Finance at the University of Florida
Conversely, if you are moderately interested, you are more likely to receive stocks. Some IPOs are already more accessible – at least for wealthier private investors – because the demand from institutions is lower. These include real estate investment trusts and corporate development companies, as well as a special purpose vehicle, Ritter said.
You also need to do your due diligence.
This includes reviewing the company’s S-1 filing with the Securities and Exchange Commission to review its balance sheet and determine the potential risks of investing in the stock. SEC Form S-1 is the initial new securities registration form required by the US-based agency for public corporations
Even if many IPOs come off badly, this is not always the case. And that doesn’t mean the price will continue to rise.
“There is very little predictability about long-term returns based on day one,” said Ritter.
Of course, if a stock falls on its trading debut or shortly thereafter, that doesn’t mean it won’t go back up. But you could wait a while.
For example, Facebook – which is now trading around $ 353 – debuted at $ 38 in May 2012. By September this year, it had fallen below $ 18. It took another year for it to return to its original asking price.
Robinhood is a five-time CNBC Disruptor 50 company and topped this year’s list. Sign up for our weekly, original newsletter that has a closer look at CNBC Disruptor 50 companies like Robinhood before they go public.
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