The Reddit IPO is almost here, but should you buy the social media stock when it first starts trading? Discover how to take a position on Reddit IPOs with us.
The Reddit IPO is arguably the most anticipated initial public offering (IPO) of 2024 so far. The social media company will price 22 million shares in a range of $31 to $34 apiece. The company is aiming to raise up to $748 million in its public offering and targeting a roughly $6.4 billion valuation.
This should put Reddit in the running to be one of the biggest IPOs of the year and will mark the first IPO of a social media company since Pinterest went public in 2019. According to Reuters, the Reddit IPO is four to five times oversubscribed, indicating there is ample demand to help the company meet its targeted valuation.
Reddit IPO - Quick Guide
Here is how to open a position on Reddit stock from the day of the listing:
Trade on the Reddit share price
We’ll offer Reddit shares to trade with derivatives on the day of their IPO. Once the market has opened, the shares will be available for you to trade. You can speculate on Reddit share price movements through Contract for Differences (CFDs).
Buy Reddit stock after the listing
You can buy Reddit shares after the IPO with zero commission* and own your share of the top online discussion board and community. You can invest as low as $1 with us through our online trading platform or full-featured mobile apps.
Once you open a Trade or Invest account with CAPEX.com and add money to it — and Reddit goes public — you’ll be able to trade or buy the stock.
What you need to know about the Reddit IPO
Reddit is undoubtedly recognisable to you if you've ever attempted to crowdsource an answer to a difficult topic or locate interesting things to do in an unexpected place. The online forum may have the vibe of a chatroom from the 1990s, but it has a sizable member base, a solid online presence, and is currently on the way to going public.
After a failed IPO attempt in 2021, Reddit is now prepared to try again by capitalising on the excitement surrounding generative AI. Reddit altered the terms of agreements for access to its API last year, and as a result, several apps were shut down by third-party developers who deemed the new terms intolerable. This led to widespread complaints and modifications that affected some of the site's biggest communities.
Now, Reddit has filed its IPO prospectus with the SEC, picked out a ticker ("RDDT") and chosen a future home: The New York Stock Exchange.
According to a letter from Reddit co-founder Steve Huffman in the IPO prospectus, more than 76 million people, on average, visited Reddit every day in December 2023. If you want to be ready to buy Reddit stock once it hits the market, here’s what you need to know.
Reddit IPO Trading Steps
- Learn how IPOs work
- Research and evaluate Reddit
- Decide how to take a position on Reddit IPO
- Build your trading plan and strategy
- Open your position
1. Learn how IPOs work
Long before the shares list on a stock exchange, the IPO process begins. A corporation must first decide whether to go public. A corporate financial audit and the registration procedure come next. A few months before the scheduled listing, word of an upcoming IPO is typically made public. This allows you time to review the company's financials and determine whether to invest in its shares.
One difference between the Reddit IPO and more traditional public offerings is that employees of the social media company will be allowed to sell their shares during the offering. Typically, company "insiders" such as the founders, managers and employees – and sometimes early investors – are restricted from selling their shares during what's known as a "lockup period" that generally lasts between 90 to 180 days.
The Reddit IPO will be focused on its users too. In addition to the company reserving 1.5 million Class A shares to help fund community-related programs that are important to its users, Reddit is allowing a set amount of users the opportunity to buy IPO shares at the offering price via a directed share program.
2. Research and evaluate Reddit
Before investing or trading the Reddit IPO, it’s useful to do your research about the company. Here are some questions to ask before investing in the Reddit IPO:
What does Reddit do?
Despite not being as popular as other social media firms such as Facebook, Instagram and Twitter, Reddit has made its name with niche—and often controversial—discussion groups. The website's anonymous posting feature is meant to promote openness and truthfulness. The community can vote on each post; the posts with the most upvotes receive the most views and authority.
Retail investors now meet on Reddit at the r/WallStreetBets board to exchange ideas and advice about stock trading. A subreddit is a community that has contributed to the growth of GameStop and other so-called "meme stocks." Their goal was to profit from a "short squeeze," which occurs when hedge funds cover short selling.
Reddit relies heavily on search engines like Alphabet's Google for customer acquisition, and volunteers around the world to moderate its content. Google is getting AI training data from Reddit as part of a new partnership between the two companies.
What is Reddit's business strategy?
Reddit sacrifices the opportunity to make money to keep its users happy. The platform does not require email addresses and does not track personal information, losing out on the opportunity to increase advertising through data exploitation, to keep its users anonymous.
And this is where legislation presents one of the largest obstacles Reddit may encounter. Users' anonymity makes it possible for malpractice and manipulation to occur, such as when hedge funds or bots steer users toward the so-called best stocks to buy now. Reddit does currently have moderators, but when it becomes a publicly traded company, it will probably come under more scrutiny. And any thread to the anonymity of users could cause an exodus from the platform.
After half a decade neglecting its ad platform, Reddit has begun to invest heavily in this area before going public.
How does Reddit make money?
The company has never made a profit, but sales grew 20% in the last year ($804M from $666M), showing Reddit can attract advertisers. Reddit’s net loss for 2023 narrowed to $90.8 million. Reddit has also raised capital through 10 rounds of fundraising, generating a total of $1.3 bn.
For a large-scale campaign, advertisers can choose to pay a minimum of $50,000 every quarter or place a bid based on a click per thousand impressions (CPM) basis. There's a "premium membership" that allows users to avoid adverts on their feeds, providing an ad-free experience. The monthly membership fee is $5.99, while the annual fee is $49.99. Both sources of revenue were met with protest from Reddit users when they were introduced.
Reddit expects to generate revenue — more than $203 million worth — from licensing its content. But this content could enable AI chatbots to “aggregate and synthesize the site’s content and let users view Reddit without visiting the site or seeing advertising.
3. Decide how to take a position on Reddit IPO
There are two ways to start investing in Reddit IPO: speculating on the share prices using CFDs or buying the stock in the hope the share price will increase in value.
Trading derivatives
Trading Reddit shares with us means that you’ll be speculating on the price movements of the company’s shares with derivatives like CFDs, similar to trading stocks like Apple or Tesla. Since you won’t own the underlying assets, you can speculate on both rising and falling share prices.
CFDs are leveraged products, which means that you can open a position with a small deposit – known as margin. Trading with leverage can increase both your profits and your losses, because they’re calculated using a position’s full market exposure, not just the margin requirement to open it.
With CAPEX.com you can trade up to 2,000 CFDs on shares, as well as indices, ETFs, commodities, bonds, forex, and cryptocurrencies.
Buying Shares
Investing in Reddit shares works differently. Leverage isn’t available, so you’ll need to provide the full cost of the position upfront. This’ll give you direct ownership of the Reddit shares, and you’ll earn a profit if the share price rises above the price at which you opened your investment.
You’ll also receive shareholder rights, like voting privileges if the company grants them. Plus, you’ll be eligible to receive dividends according to how many shares in the company you own.
With CAPEX.com you can invest in 5,000+ stocks and ETFs listed on 10 global stock exchanges.
4. Build your trading plan and strategy
We’ve highlighted some Reddit IPO trading strategies below. Remember that before using any of these strategies, you should take steps to manage your risk.
Let the stock establish some price discovery
Taking a position on the Reddit IPO on its opening day can be very different compared to other market opportunities. Support and resistance levels haven’t been established yet and people are often excited with certain expectations. One of the best ways to handle hot IPOs is to wait for the morning volatility to cool off and allow the stock to establish some ‘price discovery‘.
This will give you levels to trade off and price action will likely be less erratic and volatile. Having levels to trade off helps you manage risk, which is your number one goal when trading the Reddit IPO and any other upcoming IPOs. Placing a stop-loss order and managing trade size is a must.
Wait for the lock-up period to end
There is sometimes a "lock-up" period for IPO shares and can apply to Reddit shares also. These prohibit current shareholders from selling their shares right away following a listing and can extend for up to six months. After this time, if you see that they are hanging onto their shares, it may indicate that investors believe there is room for growth and that now is a good time to invest because the price of the Reddit stock may rise or consolidate.
However, if the share price drops following the lock-up period, it can be a sign of low investor confidence in the Reddit business. This could be a chance to use CFDs to go short.
By using this technique, you will not experience the first market volatility that initial public offerings (IPOs) typically bring about. Depending on your own risk tolerance, this may or may not be a positive thing. It is not impossible to combine these tactics. On the day of the Reddit IPO, you may potentially trade the volatility of the secondary market using derivatives like CFDs.
Take a position on Reddit stocks with derivatives
If you want to trade on upward and downward movements in Reddit’ share price on the day of its IPO, you could take a position with derivatives like CFDs. You can use these products to ‘buy’ (go long) if you think the Reddit share price will rise, or ‘sell’ (go short) if you think it’ll fall.
But bear in mind that CFDs are leveraged products, and leverage can increase both your profits and your losses.
5. Open your first position
Once you’re ready to start trading shares, you can open your first Reddit IPO position. Remember that with us you can take a position on Reddit IPO shares via CFDs on the secondary market, as soon as Reddit is listed on a specific exchange and prices from the exchange become available to our liquidity providers.
Before you open your Reddit IPO position, make sure you take steps to manage your risk like adding stops and limits to your open positions, and by monitoring your positions closely.
How to Trade Reddit on CAPEX.com
You can open a position with CAPEX.com through the device of your choice, be it a smartphone, PC, or tablet. It’s straightforward:
1. Log in to your account or create account 2. Go to the Shares section and search "Reddit" 3. Choose direction (Buy or Sell) based on your assessment 4. Set your trade size, Stop Loss and Take Profit 5. Place and monitor your trade!
Should you buy Reddit stock?
Several well-known tech insiders were among the social media company's initial investors. Sam Altman, the CEO of OpenAI, for example, has made at least $60 million in Reddit investments and has 9.2% of the voting power. Early investors included Peter Thiel, who co-founded Chinese internet giant Tencent Holdings (TCEHY), Palantir Technologies (PLTR), and PayPal Holdings (PYPL).
Despite early backing from heavy hitters in the tech sector, and the fact that IPO stocks tend to have strong first-day(s) showings, returns for the first year are generally weak. Since 2020, "the average IPO has lagged its industry average by 30% over the subsequent three years following its first closing price."
While Reddit serves a slightly different function in a different format than its competitors (think more question-and-answer and in-depth discussion than Instagram pics and platitudes), the company is still entering a ring that already has a few heavyweight champs in it. With competition such as Meta, TikTok and Pinterest, it may be difficult for Reddit to hold its own. Plus, the company has yet to turn a full-year profit.
When purchasing any stock you’ll want to consider the company's fundamentals, such as its revenue, net income and earnings per share. When looking into a company that is new to the public sphere, such as Reddit, it can be difficult to find that information since private companies don’t have to produce regular reports. Once Reddit becomes public, that information will be more readily available because the company will be required by the SEC to provide regular financial updates.
Free Resources
Before you start investing and trading in the Reddit IPO, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you become a better trader or make more informed investment decisions.
Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for stock investors who are looking to make a transition to leveraged trading.
Sources
- https://www.sec.gov/Archives/edgar/data/1713445/000162828024006294/reddits-1q423.htm
- https://www.reddit.com/r/stocks/comments/1bc6h6y/is_the_reddit_ipo_priced_favorably/
- https://www.investopedia.com/reddit-files-for-ipo-5213473
- https://www.reuters.com/markets/deals/reddit-seeks-launch-ipo-march-sources-2024-01-18/