Robinhood places 20 to 35% of its personal IPO inventory accessible to shoppers

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Investing through Robinhood can give you early access to the stocks if the company goes public.

The online brokerage reserves 20 to 35% of the shares that are to be sold as part of an IPO for its customers, as stated in its most recent application for approval. While it is uncertain how accurate the price per share will be or how many stocks will be available, experts advise approaching any IPO with caution.

“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.

IPOs essentially involve private companies becoming publicly traded companies.

This means that company shares are sold to the public and can then be bought and sold on public exchanges such as the Nasdaq – where Robinhood is to be traded under the ticker symbol “HOOD” – or the New York Stock Exchange.

There have been 215 new listings so far this year, nearly as many as the 218 IPOs in 2020, according to Renaissance Capital. It was the busiest year for IPOs since 2014 when there were 274.

Robinhood’s plans come in the midst of an effort to give retail investors better access to initial public offerings normally reserved for higher net worth brokers and institutional investors (i.e. mutual funds, hedge funds, foundations, etc.).

Usually, 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.

Robinhood’s early stocks for customers would be available through the app’s own IPO platform. SoFi Technologies is another financial technology company that is now offering private investors access to new offerings.

While these steps can expand the opportunities to participate, experts say it doesn’t change the risk associated with going public. If you’re still interested in an IPO – Robinhood or any other – there is a lot to know.

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For starters, this doesn’t mean you will get the amount you want, even if you can request stocks early on. In general, the more demand there is for an IPO, the more difficult it is to get hold of your own shares.

“If many of Robinhood’s 18 million customers choose to buy stock, they get very few shares per account,” said Ritter.

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. The SEC Form S-1 is the initial new securities registration form required by the agency for US-based public companies (Robinhood filed its S-1 Thursday.)

Even if many IPOs come off badly, this is not always the case. And that doesn’t mean the price will continue to rise.

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. In September of that 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 that topped this year’s list.

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