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Robinhood Markets

—the company that says its mission is to democratize finance for all—is down big on Thursday on news that early investors can sell stock. Large stock drops are unnerving, but like the decline on the company’s first day of trading, Thursday’s plunge isn’t a big deal.

Shares were down 14.4% to $60.28 as of 1:25 p.m. Eastern time Thursday. The

S&P 500

was up 0.4%, while the

Dow Jones Industrial Average

had gained 0.5%.

The drop follows a filing from Robinhood (ticker: HOOD) indicating early investors can sell about 98 million shares. There are more than a dozen shareholders—including tech private-equity firm Andreessen Horowitz—that are affected.  All appear to be early investors who had received convertible notes that converted into common stock when the company’s initial public offering wrapped up.

It’s common for private equity-type investors to sell stock in public companies after an IPO. What’s more, there is no requirement for the holder to sell right now. And the potential for a stock sale was listed in the company’s original registration statement—the document filed with the Securities and Exchange Commission when a company plans to raise money. Robinhood wouldn’t receive any cash from sales by existing investors.

The issue is a double-edged sword. The bad news is that the sale of so much stock would pressure shares for a couple of days. But that would also dramatically increase Robinhood’s float—the shares available to trade by anyone. That will help smooth out trading volatility in weeks to come.

The float in companies recently completing an IPO is often low since there are restrictions on when existing shareholders can sell. Typically, a lot of stock can’t be sold for 180 days.

There are about 720 million Class A shares of stock outstanding and about 130 million shares of Class B stock outstanding. The Class B stock has 10 votes per share, while the Class A stock has 1 vote per share. The Class B stock is held mainly by the founders and gives them control of about 64% of the voting power of all the stock.

There are also millions of shares represented in stock options and restricted stock units. Getting precise share counts for companies right after an IPO is a chore.

Robinhood stock is off to a volatile but successful start. Shares dropped 8.4%, to $34.82, down from its $38 IPO price, on its first day of trading. Shares have risen the four trading days since then, including a 50.4% jump Wednesday.

Shares might also be weaker Thursday because of a new Wall Street rating. Wolfe Research analyst Steven Chubak launched coverage of the stock with a Hold rating and $45 price target, far below the current level of $62.

It’s the second rating for Robinhood shares, according to Bloomberg. The other rating is a Buy from Atlantic Equities analyst John Heagerty. His price target is $65 a share.

Write to allen.root@dowjones.com

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