Financiers and social media users watched as the Elon Musk-led SpaceX completed the largest initial public offering in Wall Street history on June 12, leading to a valuation of more than $2 trillion. Groundbreaking beyond the halls of financial decision makers, personal and retirement account holders may soon see SPCX added to their portfolio when index funds include the newly public company.

An initial public offering, commonly known as an IPO, is the process through which both startup and established companies sell shares of stock to the public for the first time. 

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In the wake of SpaceX's public debut, David Brown shared his insight. An associate professor and the Brian and Clara Franke Endowed Chair in Finance at the University of Arizona Eller College of Management, Brown's research covers early-stage financing and IPOs, institutional investors and asset management, price feedback and price informativeness, taxes and retirement planning.

How does a company decide when to go public, and what factors impact that decision?

Companies decide to go public for a number of reasons, the biggest of which are: do they need capital right now, and is the timing right?

If we think about SpaceX, they are spending a ton – as are many companies – to build the infrastructure to deploy more AI. We're in a boom right now, particularly for AI stocks, which means the market has a strong appetite and people are willing to spend a lot to invest in these companies. That is what we're seeing with the valuation, not only at the IPO but in the subsequent days. We saw the stock 20% up on the first day, again on the second day and about 15% already today.

What made the SpaceX IPO unique?

What really made this initial public offer different is the scale. SpaceX was slated at a $75 billion offering, which ended up closer to $87 billion after underwriters put out extra shares. Typical IPOs are more in the millions range. 

There was also a strong push to include a lot of retail involvement. SpaceX wanted 30% of the shares placed with retail investors, which is normally under 10%. Typically, the hotter the IPO, the less is allocated to retail investors. We actually saw a little bit of that with SpaceX: Instead of 30%, it ended up closer to 20%. That is consistent with strong, institutional demand – and the strong follow-up demand we have seen in the last few days. We have already seen a huge run, from $135 to $220 when I last checked.

The third big difference was that the float is lower. The float is the percentage of the company that's actually available and traded in the market. The float of SpaceX is around 5%, whereas most companies come out and sell 25 to 30% of their shares. When you look at big public companies like Microsoft or Nvidia, almost all of their shares are available to the public.

Was this IPO a trendsetter or part of a growing change?

The SpaceX IPO is following a recent trend of trying to get more retail investors involved. There has always been a push, and it tends to happen more with firms that are more in the public eye. 

What I think is interesting is that the more retail gets involved, the worse the IPO does. It's a classic winner's curse: When you are able to buy an asset you are oftentimes the one that's willing to pay the most for it. You only get it when you're essentially overpaying. The only way retail investors get more of an IPO is when institutional investors don't want in. This is a growing trend that helps companies go public more readily, but it's usually at the expense of those retail investors.

What is the difference between purchasing shares during an IPO or in the secondary market?

Besides the price that you're paying, there really is no difference at the end of the day. In the SpaceX IPO, the listing price was $135. When it goes over $200 it looks like a great deal to get into those IPO shares. However, if you look historically, most IPOs underperform over the first year or two.

In that context, we won't really know until a year or two from now whether investors really had a great deal when they got in at $135. If you flipped it at $200, you've locked in your profit. Now, is SpaceX going to be a $100 or $1,000 stock next year?

What should consumers understand about any company before investing, whether during an IPO or in the secondary market?

There are two paths to think about. The first is that if you're somebody who already knows about stocks or about the company and wants to do the research, you can do that and form an opinion and create a valuation of your own for that company.

But, at the end of the day, for most investors, index funds are the right way to go. If you're not going to or can't put a lot of time into research and making investing your hobby, you should just invest in a low-cost index fund that's going to give you broad diversification of the market.

What is an index fund, and what changes have you seen in relation to IPOs?

Broadly speaking, an index or an index fund is a collection of stocks. The S&P 500, the Russell 1000 or 2000 or the Dow Jones are all different benchmark stocks that provide a way to measure the market. There's a big debate currently about whether to include newly listed companies like SpaceX, as well as Anthropic and Open AI – which are going public later this year – in an index sooner rather than later.

The S&P has strict rules about when a company gets included. They require the company to have been public for a year, to have been profitable – there's a laundry list of requirements to meet. In the case of SpaceX, they went about a public campaign lobbying Nasdaq, S&P, Russell to try to get them to include their shares quicker than they normally do. 

SpaceX will likely, eventually be in the S&P 500, but probably not for a year. It's going to be in the Nasdaq 100 in a couple weeks, as well as the Russell 1000. So, if you're an investor and you have a 401k with investments in broad index funds, odds are you're going to own a tiny piece of SpaceX in the next few weeks.