The hottest IPOs want retail investors buying their stock
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Illustration: Brendan Lynch/Axios
Shares of buy now, pay later provider Klarna surged 14% on Wednesday's trading debut. Unusual for an IPO, part of that pop was driven by demand from retail investors.
Why it matters: As retail is becoming a more formidable force in public markets, companies and banks are making IPOs more readily available to novice investors.
What they're saying: "Direct-to-consumer retail was almost never brought to the table by banks. That is changing. More banks are coming to us," said Stephen Sikes, chief operating officer of Public, an investing platform.
By the numbers: Public, which is used primarily by retail investors, was invited to order shares from two hotly anticipated public company releases this year: Figure and Klarna.
- Public received 10 times more buy orders for the Klarna IPO than it did for any other security during the time the order window was open.
- After Klarna was live on Public for less than an hour, the company already saw more buying than the initial allocation it got, and "almost zero selling," Sikes said.
How it works: Typically, a bank handling an IPO would sell shares to a select group of institutions or big funds.
- Banks can work with these institutions to help price the IPO, and there's more trust in these buyers that they won't sell their shares right away.
- While the majority of shares are still going to institutions, management teams are increasingly eager to get retail involved in IPOs.
Between the lines: More and more, retail investors are responsible for post-IPO stock pops.
- Companies have been staying private for longer, which makes newly public companies more attractive to retail traders.
- This can become a self-fulfilling prophecy: Retail traders are desperate for new investments, so they push up the stock price of new IPOs. That dynamic is making management teams want to engage retail from the beginning so they can have bigger post-IPO stock rallies.
Zoom in: A company like Public may only get a portion of the shares it wanted from an IPO.
- Public then chooses how to allocate shares among members.
- The platform tries to dole out shares to members who use Public as their primary investment account, who won't sell quickly and are looking to purchase a substantial amount of shares.
Yes, but: This is not always a good dynamic for retail.
- Institutions may offload shares after the retail crowd drives up a stock, leaving individual investors on the hook for losses.
What we're watching: Management teams are increasingly following in the footsteps of Reddit, Robinhood, Bullish and several other companies by creating strategies that specifically engage retail investors.
- This could either signal retail's increasing power or add to concerns about a toppy market.
