By Daniel Tortis
An online finance company called So-Fi is beginning to offer a service that will allow retail investors to be able to buy shares of companies that are going public. This is all in an effort by SoFi to democratize the IPO process. This is a monumental shift, as in the past IPO shares have only been available for institutional investors such as large hedge funds or high-net-worth individuals. Regular traders have had to wait until the shares hit the exchange. By then it is already too late with the share price usually skyrocketing and being more expensive. According to data provider Dealogic, the average first-day trading pop on U.S. listings of businesses in 2020 was 36%.
Anyone with over $3000 in their account on SoFi will be able to access this investment opportunity. Other companies are already starting to get in the action and hope to offer this service in the near future. Robinhood, for example, is planning on offering this service soon, and it will even allow for you to buy shares of their own company as Robinhood will soon undergo an IPO. Not all IPOs will be available on both platforms but it will definitely be a good start in the process of allowing amateur investors to gain access to previously unavailable territory.
The company released a statement discussing the importance of offering this service.
“Our mission at SoFi is to help people achieve financial independence to realize their ambitions. IPO Investing reflects our continued effort to make investing more accessible, by pioneering fractional shares, offering commission-free trading, creating unique SoFi-branded ETFs, and now, IPO investing.”
IPOs, just like an investment vehicle, do come with a degree of risk. Many of the companies who go public through IPOs are unproven and new. This is especially risky in the current market climate where valuations are off the charts and some companies are trading at incredibly high P/E ratios.
In order to gain access to these shares SoFi will be an underwriter on deals. In the securities market, underwriting involves determining the risk and price of a particular security. Investment banks first buy or underwrite the securities of the issuing entity and then sell them in the market. In this case, the underwriter, SoFi, will offer these securities to your amateur investors. Typically the cost of doing so is very high but SoFI is figuring out a way to do it and make a profit.
This is good news for everyday investors like us. However, it is important to understand the risk of IPOs before investing and to always diversify your portfolio. New fintech companies are continually allowing for new ways to invest with their innovative platforms. This will likely continue to be a trend for years to come.