Robinhood is a commission-free trading app that has gathered popularity among a new generation of traders. Trading on the app has been referred to as being like a game and is mainly used by new traders who are learning their skills. With a majority of users viewing Robinhood as more of a casino than a trading platform, how well can the stock do in the long run?

IPO

The US-based brokerage listed their IPO two weeks ago, debuting at $38 per share. The stock fell as low as $33.25 within 24 hours of its release. But since that low, it made an impressive gain of 150% in just five days, reaching a high of $85. Prices are now at $54, 42% up from the IPO price, as the volatility seems to have slowed.

The story so far

Robinhood estimates it opened about half of all new US brokerage accounts in the last five years. It has accomplished this through offering zero commission trading which has attracted millions of new traders, especially those starting out with smaller accounts. If they have commission free trading, how do they make their money? 81% of its revenues come from payment for order flow. In other words, they send their customers orders to trading firms that execute the trades and make a profit off the spread between the bid and the ask. 34% of this revenue stream came from Citadel Securities, s brokerage firm that came under scrutiny during the January rally of stocks such as GameStop (NYSE:GME) and AMC (NYSE:AMC).

With Robinhood offering a quick and easy site to trade with, their site became a target for new traders to get involved in the meme stock frenzy. Citadel were shorting these stocks and incurring heavy losses from the increase in GME and AMC. Accusations were made that Citadel, the largest source of revenue for Robinhood, were behind the platform halting these stocks to limit the losses they would incur. This added to the questions about their values and actions as a company.

How much room is there for growth?

There is no doubt that the product they offer is popular, especially for new traders. But what will happen when these traders get wealthier and have larger accounts? Robinhood may struggle to keep these clients as they move onto more serious brokers. A change is needed to accommodate and keep these clients in the future, whilst also continuing to appeal to new traders.

Another concern is in relation to the dodgy treatment of its users. Robinhood posted on their website in 2016 that “the firm negligently communicated false and misleading information to its customers.” This resulted in fines for the company. Both in 2016 and more recently in 2021, Robinhood has faced backlash in relation to how they treat their users. Will this be the continued theme for them going forward?

Buy or pass?

I personally find Robinhood too much of a risk at this time due to the concerns of their values and the negative views the public has of them at this time, alongside their struggles to keep clients in the long term.

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