Robinhood reserves 20-35% of its own IPO shares for its clients

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If you invest through Robinhood, you will be able to get early access to stocks when the company goes public.

The online brokerage firm is reserving 20-35% of the shares for sale as part of an initial public offering for its clients, according to its latest regulatory filing. While it’s not clear exactly what the price per share will be or how many shares will be available, experts advise approaching any IPO with caution.

“There is the potential for great volatility with an IPO as the market determines what the real value of the company is,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York City.

IPOs mainly concern private companies which become listed companies.

That is, the company’s shares are sold to the public and can then be bought and sold on public exchanges, such as the Nasdaq – where Robinhood plans to trade under the symbol “HOOD” – or the Stock Exchange. New York.

So far this year, there have been 215 new listings, almost 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 amid its drive to give retail investors better access to IPOs, which are typically reserved for wealthier brokerage clients and institutional investors (i.e. mutual funds of investment, hedge funds, endowments, etc.).

Typically, small investors should wait until stocks start trading on the stock exchange. And at that point, they might pay more than those who entered earlier. The average first-day return on IPOs last year was 41.6%, according to data from IPO expert Jay Ritter, a professor of finance at the University of Florida.

The first shares of Robinhood for clients would be available through the app’s own IPO platform. SoFi Technologies is another fintech company that now allows individual investors to participate in new offerings.

While these measures may expand the number of people who can participate, experts say it will not change the risk associated with IPOs. Still, if you’re interested in getting into an IPO – whether it’s Robinhood or another – there are a few things you should know.

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For starters, while you can request stocks earlier, that doesn’t mean you’ll receive the amount you want. As a general rule, the more demand there is for a given IPO, the more difficult it is to acquire your own shares.

“If many of Robinhood’s 18 million customers want to buy shares, they will only receive a few shares per account,” Ritter said.

Conversely, if there is mixed interest, you are more likely to get stocks. Some IPOs are already easier to access – at least for wealthier retail investors – because there is less demand from institutions. This includes real estate investment trusts and business development companies, as well as a special purpose acquisition company, Ritter said.

You also need to do your due diligence.

This includes checking the company’s S-1 file with the Securities and Exchange Commission to review the balance sheet and discover the potential risks of investing in the stock. The SEC S-1 form is the initial registration form for new securities required by the agency for U.S.-based public companies (Robinhood filed its S-1 on Thursday.)

Additionally, while many IPOs come out strong, this isn’t always the case. And that does not mean that the price will continue to increase.

Of course, if a stock falls early in trading or shortly thereafter, that doesn’t mean it won’t rise again. But you could wait a while.

For example, Facebook – which now trades around $ 353 – debuted in May 2012 with a share of $ 38. By September of the same year, it had fallen below $ 18. It took another year for it to come back to its original offering price.

Robinhood is a five-time CNBC Disruptor 50 company that tops the list this year.

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