Robinhood's unique IPO is a clever defense against competitors

·Senior Writer
·4 min read

Robinhood's IPO is a little bit different.

A handful of companies last year saw their share price surge as they made their debut in the public market. Last December, for example, Airbnb (ABNB) zoomed from an IPO price of $68 to $146 as its shares began trading.

In Robinhood's (HOOD) initial trading on Thursday, shares did the opposite, falling around 5% in the first hour of trading.

Buying shares in an IPO and capturing the initial “pop” is enticing, but regular investors typically can't buy in (they’re usually reserved for institutional investors and wealthy investors). Regular folks have to wait until shares start trading actively on the market – and if you want that pop, it might be too late by then.

In an unusual move, however, stock trading app Robinhood offered around a third of its IPO shares to its users; Robinhood has 22.5 million customers who regularly use the app. A big question emerged: Would this early access allow these investors to get a taste of the IPO pop? 

In early trading Thursday, the answer seemed to be no as the stock dipped.

IPO pops are not universally loved — a small one is nice, perhaps, but a big one indicates the company may not have sold shares at the right price — but they get a lot of attention. Especially recently: In 2020, the market saw the biggest average IPO pop in a long time. Since then, it’s cooled, but the average pop is still over 20%.

KATWIJK, NETHERLANDS - JANUARY 29: In this photo illustration, the website of trading platform Robinhood is displayed on a computer on January 29, 2021 in Katwijk, Netherlands.  (Photo by Yuriko Nakao/Getty Images)
In this photo illustration, the website of trading platform Robinhood is displayed on a computer on January 29, 2021 in Katwijk, Netherlands. (Photo by Yuriko Nakao/Getty Images)

It provides powerful marketing for Robinhood to sell shares to its own users, who stand to take advantage of a pop should it happen, though it’s far from guaranteed.

But why would Robinhood want to pre-sell so much to its own users?

Robinhood says its mission is to democratize the market – to give average investors access to markets and for a cheap price. As such, offering something that’s rarely offered to regular people (IPO shares) tracks with that philosophy. But there are also powerful reasons to get these people invested in the company.

How portable is your portfolio?

Inertia has long kept consumers from switching banks or their brokerages. But in a bid for more customers, financial institutions have tried to make that inertia easier to overcome. If you want to go from one brokerage to another, like from Robinhood to Fidelity, you can do it online (or on the phone) with relatively minimal friction.

And in its effort to draw newbie investors – and poach others from more established brokerages – Robinhood is offering customers a piece of its buzzy IPO.

If you’re not just a Robinhood customer – but also own shares in the company – you might think twice about leaving the platform for a competitor (even if Robinhood doesn’t have all the bells and whistles a Schwab or Fidelity may have, like the ability to choose which shares to sell instead of first-in-first-out). Maybe owning Robinhood stock makes you a more loyal Robinhood customer.

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This isn’t the first time that brokerages have been owned by their users; Vanguard is run as a cooperative, owned by its fund’s shareholders.

A best-case scenario for Robinhood might be something like Tesla. Though Tesla didn’t necessarily encourage its customers to buy its shares — just its cars — it became a retail investing favorite and many of the people who own Teslas own its stock. Tesla fans are often TSLA fans.

However, Robinhood’s issues last spring as well as trading outages in the past that resulted in record FINRA fines have given the platform a mixed reputation with users, unlike Tesla’s near universal acclaim for their cars.

But throughout all the issues, the company has managed to capture a huge segment of the trading population by serving a new market, netting 17.7 million monthly active users. If they can get them into a deeper relationship with the company, the chances of keeping them might be even higher.

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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