By: Bob Haegele
July 12, 2021Finding that next great investment is what every investor dreams of. An Initial Public Offering (IPO) is a company’s introduction to the stock market. It represents the first opportunity investors have to support the companies they believe are going to change the world.
Ordinarily, the average investor is unable to buy shares in a company before the IPO happens. However, in our SoFi Invest review, we briefly mentioned the possibility of IPO investing. Through this platform, the average retail investor can put their money into IPOs for the first time.
Let’s talk about how to use SoFi to invest in an IPO, and whether it’s a good idea.
Is Investing in an IPO with SoFi Invest a Good Idea?
IPOs enable you to be among the first buyers of new publicly listed companies. However, the number of IPOs has increased exponentially in recent years. This has led to many IPOs becoming unprofitable.
Back in 1980, just 20% of IPOs were unprofitable. Today, that number is 80%, which makes IPOs a relatively speculative investment.
While investing in IPOs with SoFi can be profitable, it should not form a core part of your portfolio.
Step-by-Step Guide for Investing in IPOs with SoFi Invest
If you do decide to invest in IPOs through your SoFi account, it’s not difficult to do it. Here are the five steps to follow if you want to begin taking advantage of new publicly listed companies.
- Step One – Open your SoFi Active Investing account. You cannot invest in IPOs using the standard SoFi account. Standard SoFi accounts only allow you to invest in ETFs. We recommend choosing SoFi Active Investing because it also allows you to buy individual stocks, including fractional shares.
- Step Two – Download the SoFi app. After opening your account, download the SoFi Invest app. IPOs may only be purchased through the iOS and Android apps.
- Step Three – Fund your account. While the standard investing app has no account minimum, you’ll need a $3,000 minimum to be eligible to invest in IPOs.
- Step Four – Choose your IPOs. Click on the dedicated IPO Investing tab to see which companies are currently available. At this point, you can only submit an Indication of Interest (IOI) because the stock doesn’t exist yet.
- Step Five – Buy your shares. SoFi will alert all investors who have submitted an IOI when the buying window opens. This short buying window enables you to buy IPO shares.
As you can see, it’s quite simple to buy shares with SoFi. Participating in IPOs is normally quite complex, but SoFi does all the heavy lifting on behalf of its investors.
Are There Any Special Rules for IPO Shares?
SoFi has certain rules for investors who want to participate in an IPO. While purchases are relatively simple to make, SoFi Invest looks to deter flipping.
If you want to sell your IPO shares, you can only do so after 120 days have passed. Investors who sell out before the 120-day window elapses will have to pay a fee, which varies depending on the IPO.
You are unable to sell your IPO shares within 30 days without incurring a strike against your account. SoFi operates a “three strikes and you’re out” policy with regards to short term flipping:
- 180-day suspension from the platform for the first offense.
- 365-day suspension for a second offense.
- Lifetime ban for the third offense.
SoFi takes a hard-line approach to IPO flipping because of how many market scams it invites. IPOs are especially vulnerable to pump and dump schemes.
Pros and Cons of SoFi Invest IPO Investing
Should investors be investing in an IPO with SoFi?
The answer is it depends on the type of investor you are and what you want to accomplish. The success of an IPO depends on a range of factors. Here are the main pros and cons to think about if you want to invest in an IPO.
Pros
- Getting in Early – Successful IPOs can be immensely profitable. Getting in early means potentially picking up some great deals. The whole point is to find the next Amazon, Tesla, or Netflix.
- Additional Data – Publicly listed companies are held to a higher reporting standard. Find out the real state of a company’s finances with an IPO.
- Big Profits – IPOs often lead to massive medium and long term profits. The value of an IPO alone can provide corporations with huge cash stocks for expansion and growth. This will be reflected in the share price.
Cons
- Underperformance – Significant numbers of IPOs fail to meet expectations within the first 12 months before rebounding later. Goldman Sachs discovered this does vary by industry, with healthcare sector IPOs performing the worst.
- Lockup Periods – The lockup period is the length of time IPO investors must hold their shares before selling. Standard lockup periods are 90-180 days, but can be longer. SoFi allows you to sell for a fee after 30 days, but their total lockup period is 120 days.
The Bottom Line
Is it worth setting up a SoFi Active Investing account to invest in IPOs?
IPOs are highly speculative, but the other advantages of this SoFi subscription make it worth signing up for. Adding individual stocks and other investment classes to your portfolio is an essential part of creating a balanced, diversified portfolio.
Invest for free now and create an account with SoFi Invest by clicking on this link.
