Key Takeaways
- Retail investors today have more access to pre-initial public offering (IPO) shares thanks to offerings from brokerages, including Robinhood (HOOD) and SoFi (SOFI).
- Investors can request shares of an upcoming IPO, and the brokerage will randomly allot shares from its overall allocation.
- You can sell shares on a stock’s first day of trading, but it’s considered “flipping” and firms have penalties in place to discourage it.
It’s easier than ever for everyday investors to access IPOs. Online brokerages like Robinhood and SoFi have lowered the barriers to entry, allowing anyone with an investment account (and a little bit of luck) to buy shares of companies about to go public.
Traditionally, to access an IPO, you needed to be considered an accredited investor by the U.S. Securities and Exchange Commission. This means having a net worth of at least $1 million and an annual income of $200,000 or more. For this reason, most retail investors have to wait until a company begins trading, sometimes losing out on a burst of initial gains in the process.
In fact, the IPO market has been littered with high-profile companies going public in recent weeks, including Klarna (KLAR), Gemini (GEMI), StubHub (STUB), and Bullish (BLSH). However, it’s often harder for investors who buy these companies after they go public to make gains.
Take Figma (FIG), a design software company that went public in late July. Figma priced its IPO at $33 per share, but it began trading at $85, meaning typical traders missed the chance to double their investment. Figma’s shares have since fallen to about $56 per share, meaning pre-IPO investors are up after seven weeks, while those who bought on the first day of trading are down.
How To Invest in IPOs
First, investors need a valid account with a brokerage that offers IPO access, such as Robinhood or SoFi. Both platforms enable investors to register their interest in upcoming IPOs and specify the number of shares they wish to buy at the projected IPO price. At Robinhood, the cost is about 20% more than the projected price to account for when the IPO is revised upward.
Putting in an order is not a guarantee you’ll receive shares. The brokerages are allocated a portion of IPO shares, which are then randomly distributed to the pool of interested investors. Both Robinhood and SoFi say they don’t know how many shares they’ll be allocated by the IPO underwriters.
Can You Sell Right Away?
Investors who buy pre-IPO shares are welcome to sell their holdings if a new company’s stock price jumps higher on its first day of trading, but the brokerages consider that “flipping” and have policies in place to discourage it.
Robinhood warns that selling a security within 30 days of an IPO will lock users out of participating in future IPOs for 60 days.
SoFi is even harsher, with a 180-day ban for the first violation, a year for the second, and a permanent ban in the event of a third. SoFi may also charge a fee if you sell within 120 days of the IPO, according to its website.
Important
Stocks don’t always rise on their first day of trading, and even those that do often fall below their IPO price within weeks of going public. You should always read the IPO prospectus, and be wary of companies that say they plan to use the bulk of their IPO proceeds to pay down debt.
Robinhood, for its part, said that while demand for IPOs on its platform is up five times from 2024, investors aren’t turning around and selling their shares on the first day.
“Contrary to the ‘quick flip’ stereotype, we’re seeing sustained engagement from retail investors who are building and holding positions in companies they believe in,” a Robinhood spokesperson told Investopedia. “That longevity strengthens the argument that retail IPO participants are foundational investors, aligning with company growth trajectories.”
Jay Ritter, a professor of finance at the University of Florida, noted that retail investors behave differently from institutional investors. They’re more likely to hold smaller quantities of shares, which can stabilize a stock’s price—or turn it into a meme.
“If an individual asks for 2,000 shares and receives 200, the person is likely to keep the 200 shares,” Ritter said. “If an institution asks for 20,000 shares and receives 2,000, they are likely to either sell the 2,000 shares quickly or buy more.”
How investors treat a stock depends on the sector, too, Ritter said.
“For companies with a lot of retail name recognition, such as gaming companies, retail investors can be important in determining the price as well as price swings,” he said.
The Bottom Line
Retail investors can invest in pre-IPO companies through brokerage accounts at firms such as Robinhood and SoFi. Traders indicate their interest and place an order for the number of shares they’d like to receive. Whether customers receive them is randomized and influenced by the brokerage’s total allotment. Investors can sell IPO shares as soon as trading opens. However, doing so is considered a form of “flipping,” and a brokerage may impose a penalty.
