over 2 years ago • 3 mins
Robinhood’s initial public offering (IPO) and subsequent price moves have had everyone talking, from those who happily bought in to those who regret missing out.
✍️ Connecting The Dots
Robinhood has been around for a while now, but this year the trading app became part of investors’ everyday. It was spurred on by the trading activity encouraged on the WallStreetBets Reddit forum, and did a brisk business in GameStop, AMC Entertainment and countless other “meme stock” trading earlier this year. But when the company made the controversial decision to limit the timing and direction of its customers’ trading on those same stocks, the company quickly went from hero to zero. Its IPO last month, then, was always likely to be a litmus test for which way the professional and retail investor winds were blowing.
Robinhood’s was different to the average IPO, mind you. Usually, only big institutional investors can buy in from the outset, leaving retail investors waiting to buy second-hand shares. That creates an imbalance in supply and demand that drives the company’s shares up, since institutional investors know they should be able to flip some of their shares at an immediate profit. But Robinhood made a significant proportion of its shares available to retail investors at the same time as the institutions, which meant there were fewer newcomers to sell shares onto. And with that supply-demand imbalance out of the window, Robinhood’s shares fell 8% on their first day of trading.
And then something odd happened: Robinhood’s stock jumped around 45% last week. It’s not exactly clear why, since institutional investors aren’t likely to be buying for the reasons above. What’s more, news about Robinhood’s price rise wasn’t trending on outlets like Bloomberg, so it’s unlikely that people were piling in as they heard about its surge. The most likely reason is that it typically takes a few days for retail investors to get their allocated shares after the IPO, and for trading platforms to make newly listed shares available to buy. So it’s possible that retail investor demand built up in the meantime and was finally unleashed last week.
1. Make hay while IPOs’ sun shines.
An IPO essentially transfers some of the risk of owning a company from early backers to public investors who, for the most part, get to benefit from the company’s progress without doing much work themselves. So it’s perhaps fair that most of the benefit of early share price rises goes to those early investors. If you do manage to eke out an early profit, great, but buyer beware: 60% of IPOs end up trading below their initial prices five years after they list.
2. You’re becoming more powerful.
Retail investors’ share of US stock trading is on the up, and the pros are being forced to take them more seriously. The Reddit saga has already shown what retail investors can do when they club together to influence the prices of highly-shorted stocks. Throw in their increased use of options thanks in part to platforms like Robinhood, and their influence over even bigger companies’ share prices is likely to keep growing.
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