Mendoza School of Business

IPOs for the Little Guy: Platforms Advertise to Small Investors

Published: October 8, 2016 / Author: The Motley Fool

Initial public offerings have long held the interest of the American public. With the frenzy of IPO day — and all the media coverage around hot offerings — it can be hard to resist the excitement and the idea of getting in on the ground floor. But for a long time, the average investor had to settle for watching from the sidelines.

Historically, average investors have largely been locked out of the IPO market, waiting until shares begin trading to get in on the action if interested in buying the shares. That’s because IPO underwriters — investment banks tasked with selling the shares — often issue the bulk of IPO shares to their biggest clients, such as institutional investors, including pension funds, mutual funds, and insurance companies.

In the rare cases when brokers did approach small clients about investing in an IPO, such offers might be met with suspicion, said Timothy Loughran, a finance professor at the University of Notre Dame.

“Historically if my broker called me up and tried to sell me on an IPO, I would say, ‘This is not a good idea,’ and take a pass,” said Loughran. “The only time they were going to go down to someone like me is if the IPO is having trouble and they’re having trouble placing the shares.”

In recent years, however, new services are starting to change that. Last year, one online brokerage firm began allowing investors to put as little as $250 into certain IPOs, while another, founded in 2013, advertises IPO opportunities with $100 minimum investments.

“What these new platforms are doing is they’re opening up access,” Loughran said.

And some IPO-ready companies themselves are warming up to the benefits of including small investors in share allocations. Smaller investors are more likely to pursue a buy-and-hold strategy for stocks, meaning less volatility for the company’s shares.

Read the entire story on the Motley Fool website.