Traditionally, partaking in an IPO, that is purchasing stock at the initial offering price, is difficult and usually requires large buy orders with share allocations going to the preferred clients of big brokerage houses. However, as technology continues to make trading stocks more accessible to everyday individuals, investing in IPOs has slowly followed along.
The latest step towards giving Main Street investors the same footing as wealthy and institutional investors is Robinhood’s new IPO access, which gives Robinhood users the ability to purchase shares of a stock at the IPO price, alongside the hedgies and other elites.
This is a pretty big deal, because even with steps that have been taken by other online brokers to open up access to stocks during the Initial Public Offering, there remained hurdles that prevented many people from qualifying.
Each broker has its own rules about who can and cannot qualify for IPO purchases, but across brokers, investors typically need $100,000 in household assets (or more). This tends to not include 401(k)s.
Additionally, investors need a few thousand dollars in their account, which already disqualifies a lot of retail investors. The average portfolio size on a Robinhood account is between $1,000 and $5,000, which is likely rather representative of retail investors considering the fact that the company has 13 million accounts. And, when you consider that there are million dollar accounts that are inflating this average, it's safe to say that most Robinhood and retail investors do not have a few grand lying around.
Furthermore, if you are able to qualify and get selected for an IPO on not-Robinhood, you will likely have to purchase the stocks in blocks of 100 shares. So, if the stock’s IPO is in the range of $10 and $50, the average Robinhood account would have to liquidate and invest their entire portfolio into the volatile IPO. Basically, this means that retail investors that are at all concerned with having a diversified portfolio are excluded as well.
How To Partake In An IPO at Robinhood
Participating in an IPO on Robinhood is simple. First, you’ll want to follow the IPO Access page, which gives you a list of upcoming IPOs that you can choose from. For now, FIGS, Inc, which will have the ticker symbol FIGS when it begins trading on May 27 is the only IPO available to Robinhood users.
On the IPO stock’s page, investors can and should read the prospectus. The prospectus gives potential investors important information on the investment offering and provides details on the investment objectives, strategies, and performance, among other things.
From there, you just have to click 'agree' to confirm your eligibility, which basically is just you saying that you are not a restricted person, such as the spouse of the company’s CEO, or other family members. It also confirms that you are aware of the risk that comes with investing in an IPO, which is a very real issue that investors should take seriously.
Included in the eligibility criteria is that Robinhood wants its investors to recognize and understand its so-called "flipping" policy. Under the flipping policy, investors are blocked from receiving any additional IPO placements for 60 days if they sell shares in an IPO within the first 30 days. This essentially is Robinhood placing investors in a half-hearted lockup period to ensure that its investors don’t get blamed for a stock tanking during its IPO. This also means Robinhood investors will have to be selective about which IPOs they want to participate in if they're to sell into an "IPO pop" when a stock soars on the first day of trading.
It's a half-hearted gesture, and rightly so, because Robinhood doesn’t prevent you from selling your shares during the first 30 days, nor from buying more (likely a lesson learned from the trading halts on GameStop). Robinhood will, however, penalize you if you sell out of your IPO shares before the 30 days are up. The penalty is a 60 day ban from IPOs, which, depending on how lucky you have to be in order to get IPO shares, might not really be any real punishment at all.
After confirming the eligibility criteria, investors are chosen at random, meaning, the more people that want in, the lower your odds are at getting shares. Robinhood says that order size, account age or value, and whether you are a Gold member or not will not affect your chances of getting IPO shares. Once the final price is announced, you confirm that you still want to buy the stock at that price, and then you wait and see if you are lucky enough to be selected for shares.
