Buying IPO Shares: More Small Investors Could Gain Access
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Here's your money briefing for Monday, June 7th. I'm J.R. Whelan for The Wall Street Journal. For decades, if you wanted to buy shares of a company that's about to go public through an IPO or initial public offering, you generally had to be a big Wall Street institution. But lately, there's been a big push to open up access to IPO shares to individual investors.
Small investors have really become a bigger force in how stocks trade and in how stocks are covered and talked about. And so there is just perhaps some interest now for companies in trying to court that small investor audience.
Coming up, WSJ Heard on the Street columnist Telus Demos will talk about how some trading platforms like Robinhood are allowing individual investors to get in on the IPO action and the risks that go along with it. That's after the break.
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With so many companies going public on stock exchanges, the IPO market has already raised a staggering $158 billion so far this year. That money has come almost exclusively from big, well-connected investment firms. But as individual investors become a bigger force in the market, there are efforts underway to make IPO shares available to them as well. Here to talk about it is WSJ Heard on the Street columnist, Telus Demos. Telus, thanks for being with us.
Thanks for having me.
So tell us, let's make sure we're all on the same page here.
What change are Robinhood and SoFi proposing for retail access to IPO shares?
An IPO is when a company goes public and offers shares to the public for the first time. But traditionally, that means big banks and investment firms get a hold of the shares first before your average everyday investors can. So where does that leave those individual investors?
Traditionally, it's meant that individual investors, you know, kind of small, self-directed investors, they might have an online brokerage account.
How have IPO allocations traditionally favored big institutions over individual investors?
It means that they really couldn't buy that IPO until it began trading. And what that means is that they missed out on any gains from the offering price of the IPO to where it started trading in the market. That is what is known as the pop for an IPO. And historically, it's been a pretty sizable number over a very long period of time. Over decades, it averages, you know, somewhere between 15 and 20 percent. And it means that retail investors didn't have access to that for the most part.
And this has been a long running issue. Why haven't individual investors been allowed into this process on a larger scale until now? And what are the arguments in favor of opening things up?
Historically, the Wall Street banks that underwrite IPOs and a lot of the companies going public, because there's such overwhelming demand for almost any IPO relative to the supply of shares, they've been able to basically choose who they want as their investors. And the thinking historically has been you want to have big, long-term institutional investors as kind of the base of your new company as it goes public. And so the idea has been to get it into the hands of investors who've spent a lot of time with the company, who really understand the company, are looking to own it for a long period of time.
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