I use Robinhood. Should I be worried?
Brokerage accounts like Robinhood have become increasingly popular in recent years. In fact, Robinhood is a big draw for new investors because it allows them to buy stocks and not pay commissions per trade. These commissions can eat into investors’ profits, so avoiding them is a good thing.
But Robinhood had a rough start to August, and much of that has to do with the platform’s initial public offering (IPO). If you’re using Robinhood, here’s what you need to know.
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What happened to Robinhood’s stock?
An IPO takes place when a private company decides to go public and offer its shares to investors. Robinhood went public on July 29.
At first, the results of this IPO were disappointing, with Robinhood shares falling below the initial IPO price. But then investors picked up Robinhood shares at a rapid pace, pushing the price up. The rally was so intense that trading in Robinhood shares was temporarily halted on August 4. By August 5, Robinhood shares had plunged, but they rallied again the next day.
Should Robinhood users be concerned?
At the end of last week, Robinhood was forced to tap into lines of credit and take on new debt to ensure it had enough capital to settle deals as they entered. The fact that the company had to seek emergency funding is something investors in its stocks should rightfully be concerned about.
What is also concerning is that a number of venture capitalists who invested in Robinhood early on were quick to unload their shares. It is not uncommon for venture capital firms to cash in on stocks once a company they have invested in goes public. But it’s also a sign that these investors thought the Robinhood rally was temporary – and that they wanted to exit before stock prices fell further.
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All of this means that it is a precarious time to invest in Robinhood shares. But if you’re just someone who uses the Robinhood platform, that’s another story.
It’s true that Robinhood faced its share of trade halt lawsuits in a series of memes stock rallies earlier this year. But the company remains a popular trading platform – and users and investors are likely to remain loyal. So, if you are using Robinhood as a broker, there is no reason to rush and withdraw your money.
We don’t know what the future holds for Robinhood’s stock price or what regulatory changes might come in light of the company’s ongoing legal battles. Chances are, however, that if new business regulations are passed as a result of Robinhood’s actions, they will not apply only to Robinhood, but to all brokerage firms.
If you’ve used Robinhood so far, there’s no reason to find another brokerage just yet. But you may want to suspend buying shares of its stocks until the trading cools down.