What’s going on with Robinhood’s stock? – News FOX23
Robinhood’s shares sent investors and short-term traders into a frenzy less than a week after its IPO.
Trading under the symbol HOOD, the stock went public on July 29 in the lower range of Robinhood’s initial price projection. The stock then fell, hitting $ 33.53 the next morning.
But there was a surge of buyers, and the stock price more than doubled from $ 35.83 to $ 77.03 in less than 48 hours, followed by a sizable pullback. Many of these traders have taken options contracts.
What is causing such wild price action? And is Robinhood just another stock of dangerous memes like GameStop that will leave some buyers with big losses?
What is Robinhood and why is it controversial?
Digital natives have mostly embraced the often controversial online trading platform, resulting in explosive growth. Robinhood had around 18 million users and $ 80 billion in early July, according to CNBC, up from 7.2 million users in March 2020.
It first made a name for itself by competing with so-called “discount brokers” through commission-free stock trading. But Robinhood’s transparent, easy-to-use app, which I reviewed earlier this year, has drawn criticism for attracting people who treat the stock market like a casino.
“You have inexperienced people without a lot of capital who engage in business activities that can be dangerous to their financial well-being,” said money expert Clark Howard. “You have people who trade as if it were gambling. For them, it’s like they’re in a giant electronic casino rather than investing in stocks for long-term financial security.
Robinhood had several issues with its technology crashing during high volume days. In addition, it accepts payment for order flow (PFOF) as its main source of income, a controversial practice. And the company initially did little to warn or educate its relatively inexperienced user base about the dangers of options trading and leveraged trading.
What Happens to Robinhood’s Share Price After the IPO?
Very little has changed in terms of Robinhood’s valuation from the day it went public until its huge stock price spike less than a week later.
This spawned a number of headlines calling Robinhood “memes stock” and comparing it to GameStop. Despite some comparisons, there are some major differences in my opinion.
The Robinhood share price surge is noticeable, frothy, and likely unrelated to a significant change in the valuation of the company.
Unlike Robinhood, GameStop was a seemingly dying business: the market for used console video games has mostly moved online. Still, the GameStop share price jumped about 1,500% in January in one of the most remarkable short cuts of all time. The leveraged hedge funds had sold short more than 100% of the available stocks.
A group of opportunistic, risk-taking traders gathered via the Reddit Wall Street Bets forum and started buying the stock. This sparked a short push fueled by a “Let’s get back to the elite people of hedge funds” element.
Seeing so many people doing well has encouraged more people to get into the business. Some who bought near or at the top lost a lot of money. In some cases, these traders lost money that they could not afford to lose.
How is Robinhood potentially different from GameStop?
Robinhood has significant business risks. For example, if regulators crack down on PFOF, or if something negatively impacts Robinhood’s booming cryptocurrency business, the business would likely face a big challenge.
You could say that Robinhood is, at least in some ways, more like Tesla than GameStop. It’s a tech company with a potentially lucrative future. The stock price may be trading above what its fundamentals say it should be today. However, it’s not crazy for an investor to think that in the future, if they continue to do well, Robinhood could eclipse most other fintech companies.
So while the stock may give investors a boost in the first few weeks after its release, it at least makes sense to prove that the stock is worth more than its initial IPO.
Should I Avoid Robinhood Stock?
If you bought Robinhood in the first few days after its IPO and weathered the massive push, you have done well. However, you’ve already lost a good chunk of your winnings if you’ve passed the peak.
To put it another way, it’s difficult (if not impossible) to always buy low and sell high.
Clark is adamant that it is financially dangerous to treat trading actions as if you were in a casino. In other words, don’t take big risks by betting on wild short-term fluctuations. He says that a real investment requires at least five years – preferably a decade or more.
Clark also discourages anyone from making concentrated investments in a single stock. He recommends that you invest in a target date retirement fund through your 401 (k) business or through a Roth IRA.
If you insist on building a portfolio of individual stocks, he says you should own stocks in at least 50 different companies, if not more. And you need to monitor these companies and be able to handle tax loss recovery and portfolio rebalancing.
In other words, if you see all the huge gains that some people have made on GameStop or Robinhood and are looking to do it yourself, you are taking a major and possibly misguided risk.
There is nothing wrong with holding Robinhood stocks as part of a well-diversified portfolio. This assumes that you research the company and decide to invest in it for a long time.
But it is a bad idea to take a large chunk of your investment portfolio and make a focused short term bet on any stock. This is true regardless of how fast its price increases.
More investment resources:
The post What’s up with Robinhood’s inventory? first appeared on Clark Howard.