What You Should Know About Robinhood

Robinhood is a trading platform that has caused quite a stir in the past few months. This company styles itself as a facilitator of investment for the masses. In the words of Nora Chan, Robinhood spokeswoman, the platform was designed ‘With the goal of making investing feel more familiar and less daunting for an entire generation of people previously cut out of the financial system.’ This sounds very nice to some; others are less impressed by the kind of investing they feel the platform encourages. Robinhood was recently forced to pay $70 million in penalties for facilitating risky trading practices, misleading customers, and insufficiently overseeing its technology. Due to this kind of pressure, Robinhood, which offers an attractive app that trades even fractions of stocks worth a dollar, recently removed the green confetti icon which met users’ eyes on successfully completing trades. In fact, it’s fairly common for quick-growing startups to run into regulatory troubles as they get moving, so all this news need not be such an alarm bell to traders. Let’s review the story of Robinhood over the past year, and especially since its IPO (Initial Public Offering or rebirth in public form) at the end of July 2021.

Robinhood’s Journey into Pandemic Times

The company was founded in 2013 and, amazingly, had claimed 20 million users as its own by 2020. Initially, it grew steadily, offering zero-commission stock trading and a gamified user experience. When Covid-19 arrived in early 2020, Robinhood began to grow in popularity due to lockdowns and their consequent demand for entertainment and new sources of income. 2020 was a very impressive year for Robinhood, a year in which many other companies found themselves struggling, as the company reported net profit of $7.45 million dollars on net revenue of $959 million.

Q1 of 2021 saw three million new accounts enter its platform and a huge revenue increase of 263% to $331 million. In the following quarter, believe it or not, revenues more than doubled to $565 million.

The big news for Robinhood in 2021 was its transformation into a public company at the end of July. Traders’ responses to its IPO were not initially explosive. Robinhood’s first day as a public company opened with Robinhood share prices worth $38 and closed with shares at $34.82. It is known, however, that companies often experience price movements soon after their IPOs which later settle down and move in opposite directions. This certainly was one of those cases, because Robinhood share prices surged up to $85 in the beginning of August.

… And Beyond

In post-pandemic times, it’s unclear to what extent Robinhood will be able to maintain its growth. Will customers continue to sign up on its platform in similar numbers? Only time will tell. As to the more immediate future, the company has already warned that its Q3 2021 results will slow down due to lower trading activity and lower revenues.

There are different views on how to put together the explosive data and legal history of this company to form a picture of what the future holds for it as a trading instrument. Some say this depends on whether it will be able to fashion itself into a platform suited for educated and responsible trading, as opposed to an arena for risky speculation. Many seasoned traders do see a future for Robinhood.

Others, like David Trainer, CEO of New Constructs, are more cautious and believe Robinhood ‘Will likely not be able to continue the robust growth it saw in 2020 due to looming regulatory risk, increasing competition and an undifferentiated service.’ Another point that makes traders pause before tapping the ‘buy’ deal button has to do with the fact that Robinhood earns a big chunk of its revenue from order flow. Therefore, Trainer warns, ‘If regulators were to outlaw payment for order flow, Robinhood’s revenue would be severely affected.’