A close-up on Robinhood stock
Since August 2 a new stock is available for trading with the FBS broker under the ticker symbol #HOOD.
What is it?
Robinhood is an American company with the main office located in Menlo Park, California. It was founded by Vladimir Tenev and Baiju Bhatt back in 2013. Robinhood is a stock brokerage company that allows customers to buy and sell assets with zero commission. The startup offers equity, cryptocurrency, and options trading, as well as cash management accounts. It also provides a stock brokerage platform that democratizes access to the financial markets and aims to make people comfortable trading stocks using its application. The company's revenue comes from three sources, such as interest on customer balances, sales of information about clients' exchange orders to high-frequency traders, and margin lending. As of 2021, the number of Robinhood clients has reached 31 million users.
Robinhood is funded by 65 investors. Over 25 funding rounds the company has raised a total of $5.6 billion. The stock opened with $38 in its July 29, 2021 IPO, but lost 8% during the first trading session.
What are the reasons for this failure?
Since the beginning of the pandemic, when the app has become very popular with retail investors, Robinhood has experienced major technical failures that have caused customers to lose money. Users were often deprived of the opportunity to participate in trading and manage the account, as they could not log into the account. As a result, in August 2020, the Securities and Exchange Commission (SEC) began to check the project. In total, in the first half of 2020, more than 400 complaints were filed against the company with American consumer protection agencies. The expansion to the UK market had to be postponed.
Charges of fraud with clients
Robinhood makes money by selling investor orders to market makers. This principle is called Payment For Order Flow (PFOF). Market makers are large sellers and buyers in the market. As they receive an information about the transactions of its customers from a broker, they strive to execute it with the maximum benefit for themselves. As a result, trades could be executed at prices unfavorable for investors. This scheme makes Robinhood's services free for investors. The service did not disclose the fact that users' data were sold to financial intermediaries. For the fact that the company did not inform its clients about the methods of earning, investors filed a class-action lawsuit against Robinhood. As the result, the broker was fined $65 million by the SEC.
To make investments "available to everyone," Robinhood targeted newcomers. Therefore, the process of using the application was designed in a way to be intuitive for unprepared investors. After the first transaction was made, confetti appeared on the user's screen, the service was compared to a game of poker. The authorities of the US state of Massachusetts filed a complaint against Robinhood, accusing the broker of using gamification to attract new customers. They attributed ratings, tips, alerts, and emojis that accompany investors in the application to this process. The state authorities considered the broker did not protect novice investors.
Suspension of trading "meme" stocks
After the excitement with the "dispersal" of "meme" stocks by retail investors in early 2021, public discontent fell on Robinhood again. In January, the broker limited operations on 50 of the most volatile assets, such as the shares of GameStop, AMC, and several other companies. As a result, users filed a class-action lawsuit against Robinhood.
The company was accused of collusion with large hedge funds, and the co-founder of Robinhood, Vlad Tenev, even had to report on the situation in the Financial Services Committee of the US House of Representatives.
Bad customer support
Many of the company's customers have complained about poor customer support, and sometimes no support at all. Initially, the application contained a contact phone number, but later it disappeared and only the email address remained.
This method of communication is inconvenient due to the impossibility of getting advice promptly, but Vlad Tenev claims that e-mail is the most convenient way to communicate with clients. In this respect, the broker is similar to Silicon Valley companies that rely on technology rather than face-to-face communication to build their support service.
What are the company's benefits?
Robinhood's zero fees have made investments more democratic. Users can invest even if their account has only $1. This brought a huge number of users to the platform. Robinhood gives one share for opening a trading account, as well as in case of attracting a new user through the referral program.
Popular and affordable tools
The broker provides an opportunity to invest in cryptocurrencies, as well as buy a part of expensive shares which users cannot afford to buy.
Convenience for traders
The Robinhood app is best for active traders as it does not take any commission on trades.
Company promotions for users
During the IPO, Robinhood reserved 20% to 35% of the outstanding shares for its clients. This is another innovative step for the company as private investors cannot participate in an IPO.
The future of Robinhood
Robinhood has changed the industry. All US brokers aim for zero commissions. However, the gamification of investments will negatively affect long-term relationships with clients, since it makes investors take stock trading unseriously. Many of them will not be able to last long in the stock market. Despite this, Robinhood is unlikely to be blown away, as the company has broken out into the leaders of the brokerage industry and will be able to maintain these positions on the horizon for 20-30 years.
At the moment, the price has formed 1 support line at the $34 and 2 resistance lines at $36.5 and $38. The best time to open short or long trade will be the breakout of $34 support or $38 resistance respectively.
The stock is available to trade from August 2 in FBS trader!
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