Robinhood started trading at $38, fell about 10 percent, recovered, but still closed 8 percent at $34.90 on the first day of trading. It’s the worst first day of 51 companies that raised as much as Robinhood or more. according to Bloomberg. It’s also bad news for Robinhood’s experiment to offer retail investors a share of the IPO.
Robinhood’s shares priced at the lower end of the target price range of $38 to $42 per share, perhaps because of concerns about volatility or perhaps because Robinhood wanted to make a doll for its retail investors. And while Robinhood had said it would allocate up to 35 percent of its shares to retail, only 20 percent actually went to retail, which “indicated less interest than expected.” according to The New York Times.
Because the stock was traded, institutional investors — those who traditionally buy IPOs and who bought the majority of them — may be wary of future IPOs if many retail investors are involved, according to Robert Le, an analyst for Pitchbook. That could mean bankers and other companies don’t give retail investors as much access to future IPOs.
A bad first day of trading may not mean much to Robinhood in the long run. I mean, Facebook had a disastrous IPO in 2012 – pricing at $38, not doing much the first day, and then dropping during the following trading days. By the way, Facebook’s current share price is $358.32. It is demonstrably successful! So I don’t know what today means for Robinhood’s company. In addition, Robinhood has sold stock to its customers – and they can be very loyal investors if they like the product.
Retail investors may not seek to maximize their returns, says Josh White, an assistant professor of finance at Vanderbilt University who was previously a financial economist for the Securities and Exchange Commission. They might just do something gamble. “Investors are trying to maximize their happiness, not their wealth,” White says. “A lot of people get utility – pleasure or joy – from trading stocks.” Perhaps, he suggests, this is better than going to a casino or gambling on DraftKings, as companies can use the money to invest in jobs and growth.
Robinhood is synonymous with the rise of meme stocks and retail investing. In fact, in a complaint the SEC filed today It says to Nikola founder Trevor Milton that Milton was “engaged in a relentless public relations blitz targeting a class of investors he called “Robinhood investors.” The complaint goes on to say that Milton was tracking the number of new Robinhood investors who bought into Nikola’s stock as a sign of success Milton is accused of securities fraud; Nikola, which peaked in price above $65 last year, is now worth $12.26.
If those retail investors lose a lot of money, that could be a problem for brokers — not just Robinhood. “Ultimately, these will be clients that all brokerage firms want to attract,” White says. “If they lose a lot of money now, are they going to stop investing altogether?”