Don't Invest in SpaceX on Its First Day of Trading. Wait for This to Happen First

SpaceX (NASDAQ: SPCX) is expected to be one of the largest and most highly anticipated initial public offerings (IPOs) of all time. However, that doesn't mean you should rush out and buy the stock on its first day of trading, which is expected to be June 12. In fact, according to the book, The Lifecycle Trade, more than 90% of IPOs trade below their first-day trading low at some point.

The SpaceX IPO, meanwhile, has another quality that makes buying the stock on its first day of trading even more potentially perilous. Typically, most hot IPOs are allocated to select institutional investors with strong relationships with the lead underwriters. Only about 5% to 10% is typically allocated to retail investors, and those are generally very high-net-worth individuals.

However, SpaceX's IPO is being heavily peddled to retail investors, with about 30% of its allocation going toward this group. Investors will be able to put in for allocations through various platforms, including Robinhood, SoFi, Morgan Stanley's E*TRADE, Fidelity, and Charles Schwab. The IPO is also reportedly being heavily pushed by JP Morgan to its clients. While investors who receive allocations are generally asked to hold the shares for at least 30 days -- or it could keep them from participating in future IPOs -- there are no restrictions on selling right away.

If the SpaceX IPO opens up big, retail investors may look to cash out quickly. Another scenario is that it doesn't open with a big pop, at which point nervous investors could start selling the stock based on disappointment. This famously happened with Facebook, now Meta Platforms, which had a large IPO with a huge retail allotment (25% vs 30% expected for SpaceX).

Brokers will generally defend a large IPO from going below its IPO price on the first day of trading, but after that, all bets are off. Facebook's stock lost more than half its value in the months following its IPO. So what's an investor to do?

Image source: The Motley Fool.

When to buy the stock

Instead of buying SpaceX stock on the first day of trading, first decide if you believe in its vision and whether this is a stock you really want to own for the next five years or longer. A lot of its valuation is based on pretty far-out ambitions, not current fundamentals or even what it's currently doing, like building artificial intelligence data centers in space.

If you still want to own the shares, see how the first day of trading goes. If the stock is holding steady or going up, that's a good sign. IPOs are generally volatile out of the gate, and you really want to wait until the stock forms an IPO base where it starts trading in a relatively narrow range. This will help protect you from the common opening-day pop-and-drop scenario.

Also, be aware of any lock-up periods. SpaceX has a tiered lock-up, with the first big one kicking in after its first earnings report, letting insiders sell up to 20% of its shares. This could actually be the best time to get in, as these lock-ups often create selling pressure.

Charles Schwab is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Meta Platforms. The Motley Fool has positions in and recommends JPMorgan Chase and Meta Platforms. The Motley Fool recommends Charles Schwab and recommends the following options: short June 2026 $97.50 calls on Charles Schwab. The Motley Fool has a disclosure policy.