Retail investors can expect access to this summer’s most anticipated and perhaps largest initial public offering in history. But experts say you can’t buy every stock you want, and that’s not a wise move for all investors.
Elon Musk’s rocket and satellite company SpaceX said some of its shares will be sold directly through online brokerages such as Robinhood, Fidelity and Charles Schwab, according to a prospectus released by the Securities and Exchange Commission on Wednesday.
The company is reportedly aiming to raise up to $75 billion in a public offering in June, which would make it the highest-paid debut ever in the U.S., with the title currently second only to Alibaba’s $22 billion public offering in 2014.
There’s a reason investors are generally keen to get on the ground floor of proverbial newly public companies. From 1980 to 2025, stock prices rose an average of 19% from their public price on the first day of trading, according to data from Jay Ritter, director of the IPO Initiative at the University of Florida.
But Ritter said shares at public offering prices are generally not available to retail investors, especially in the case of “popular” IPOs, where he estimates that 95% of the shares go to institutional investors, such as large Wall Street banks. For all IPOs, Fidelity fixes the ratio of institutional to retail investors at 90/10.
This week’s filing indicates SpaceX may be planning to buck this trend. Reuters reported in March that the company could offer up to 30% of its shares to retail investors.
Experts say that under certain circumstances, short-term funds could be invested immediately after the IPO launches. However, given the potential for increased volatility, long-term investors should tread carefully and may wish to take more cautious action.
“We’ve always taken a wait-and-see approach to that market,” Josef Schuster, founder of IPOX Schuster, an investment and research firm focused on IPOs, told CNBC Make It in April.
If you want to get into SpaceX or any other IPO, it’s wise to do your homework on how these stocks tend to behave, Schuster and other experts say. Here’s what you need to know:
How retail investors can access IPOs
If SpaceX ends up drawing in more retail investors than usual, it could be for a number of reasons, Ritter said. For one thing, SpaceX’s sister company Tesla has retail investors making up the majority of its outstanding shares, and Musk may want to replicate that model at SpaceX, he said.
Another is that “investors in the stock are more likely to buy the company’s products, in which case they sign up for Starlink or use X,” Ritter says. “Therefore, a large retail allocation can improve the company’s cash flow as a result of more users of the product.”
If you want to buy stock at the public offering price through an online brokerage, you’ll likely need to submit a request to buy the stock, Ritter said. And given the buzz surrounding SpaceX, some competition is to be expected, he added.
“If a Schwab or Fidelity customer asks for 500 shares, they will (probably) receive fewer shares than they asked for,” he said.
If the stock is not available at the public price, you should buy it after it goes public. And once the stock hits the market, there’s no telling how a particular IPO stock will perform, Ritter said. “On average, the return from opening price to closing price is close to zero.”
Things to consider before investing in IPO stocks
If you’re interested in buying IPO stocks, experts say there are several factors worth considering. Here are three to keep an eye on.
1.Float
The percentage of a company’s stock that is available to the public, known as its stock float, is an important factor to pay attention to. Schuster says very low float is a “major red flag” when considering which companies have historically outperformed or underperformed.
Issuing a small number of shares can cause a company’s stock price to soar in early trading, he said, but if a company receives negative news, such as not making expected profits, volatility could continue and pose huge risks.
SpaceX is rumored to be coming to market with a free float of about 5%, and the stock price could be in historically difficult territory, Schuster said. “If it’s less than 7%, you need to be very careful.”
2. Sales
Ritter says look at a company’s revenue once it files a public filing with the SEC.
Companies that went public with at least $1 billion in revenue in the past 12 months have on average caught up with the market in the three years since going public, “while smaller companies have underperformed on average,” he said.
In other words, companies with a strong sales track record are less likely to underperform than those with a weaker track record.
Still, you need to decide whether it’s worth holding long-term based on the company’s fundamentals, Ritter told CNBC Make It earlier this spring. IPO companies tend to underperform when their stock price significantly exceeds sales, but it may still be worth buying the stock if, for example, you believe the company can rapidly and continuously improve its financial performance in the coming years, Ritter says.
3. Role of portfolio
Experts say it’s important to consider what role you want specific IPO stocks to play in your portfolio. Schuster said he typically prefers to invest after a stock has been on the market for a while, and cautions against trying to take advantage of the short-term big swings that can occur immediately after an initial public offering.
“I think investors need to be really careful about jumping in at this point,” he says. “But in the future, once it starts trading, I’m going to trade it and see how it goes. Often the entry point for an IPO is much lower than the first trading day.[Some companies]weren’t winners on day one or when you bought them on the first trade, but they became winners over time.”
Both Ritter and Schuster caution against betting a large portion of your portfolio on a single IPO stock, recommending holding your investments as part of a larger, more diversified portfolio. It’s also wise to consult a financial advisor before making any changes to your portfolio.
And if you want early access to SpaceX and other pre-IPO names, they may already be available to you as part of a more diversified strategy.
Mutual funds are allowed to hold up to 15% of their portfolio in so-called illiquid assets, which may include private equity and private real estate holdings. Baron Opportunity, a mutual fund that seeks to invest in innovative and fast-growing businesses, holds 13.8% of SpaceX’s portfolio in its latest report.
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