With its IPO set to take place this week, Robinhood, the discount brokerage that inspired millions of Americans to start trading stocks with their stimulus checks during the pandemic, is expected to rely heavily on retail traders to buy its shares, Bloomberg reports.
The company is "disrupting another stock market norm" by giving ordinary investors access to a "huge slice" - up to 1/3rd - of the shares being offered in its IPO.
To be sure, having early access to a company's shares can give investors a big advantage. So far this year, US IPOs raising at least $100MM have risen 34%, and that's including with the drag created by Didi.
However, expanding early access beyond Wall Street has its risks. For one: retail traders are more likely to try and sell their shares for a quick profit - or dump them if the price starts moving against them, hoping to get back in at a lower level, says Matt Kennedy, a senior IPO market strategist at Renaissance Capital.
"The major downside, and the reason this is so unusual, is issuers typically place a great deal of value on the investment bank’s ability to place the shares with institutional, long-only investors who understand the business, believe in it and have done their homework," Kennedy said. "Retail traders have more of a reputation of flipping, so this could result in higher volatility."
Giving retail traders early access to shares is still an unusual practice, although Robinhood and some of its rivals have launched programs this year allowing retail investors to buy in. Uber and Lyft both allocated shares to their drivers (and look how those IPOs turned out).
For those who are curious about Robinhood's "IPO Access" program, here's how it works, according to the AP:
Traders interested in buying shares must sign up for the IPO Access feature. Once there, they place a “conditional offer to buy -” or "COB" - and say how many shares they hope to purchase. That conditional offer doesn’t become an official order until the IPO is priced, likely Wednesday night.
IPO Access may receive the full number of shares they put in for, or they might get a partial fill (or nothing).
But to try and discourage them from selling at the IPO, the company is warning traders that anybody who sells within 30 days of the IPO will be barred from buying shares at IPOs for 60 days.
Some traders who are planning to "scalp" - that is, sell quickly into an opening day pop - the HOOD IPO are planning to buy on a different platform, like TD Ameritrade.
The 23-year-old, who began using Robinhood in 2016 and hosts online communities of investors, says he has signed up for Robinhood’s IPO platform and intends to buy shares in the company and hold them “for a very long time.” Tran also plans to use another trading platform to buy shares in Robinhood once they make their debut and then “scalp,” or sell those right away to profit on what he expects will be a big first-day pop in the stock.
"I’m going to watch the stock rally with hype, then I’m going to get out relatively quickly, banking my profits," Tran said.
And if the stock should open below its offering price?
"I would be very, very surprised if that happens,” he said.
“If that does happen, that just means that I will be able to buy more shares with the same amount of capital."
And finally, in what sounds like a gimmick to help the company drum up buzz, a message hidden inside a test upgrade of the company's iPhone app claims Robinhood is developing an option called "round up investments" that will allow users to invest their "spare change" in specific stocks. The company is also exploring a rewards program that will dole out special bonuses to anybody using the round-up feature. It's just Robinhood's latest attempt to stay abreast of competitors.
The feature is offered by financial savings apps like Acorns, Chime and Wealthsimple. Typically those apps connect to a debit card account, though the Robinhood code didn't say exactly what the company's plans are for the feature.
"There is more we can do with direct deposit and debit cards, particularly given the opportunity to connect rewards with our brokerage and crypto offerings," Chief Financial Officer Jason Warnick said in response to a question on the firm’s growth strategy.
It is also planning new features to try and guard against the extreme volatility in crypto prices.