Robinhood, the stock-trading app that became a household name and media mainstay in 2020, went public on July 29, 2021, at a price of $38 per share, listing on the Nasdaq stock exchange under the ticker "HOOD." The IPO came as the company was confronting a convergence of record user growth, public outcry and regulatory scrutiny, which will likely assure Robinhood a spot in the headlines in the following weeks and months, whichever direction its stock price goes.
» Want to learn more about Robinhood? Check out our Robinhood review
Why the hype around Robinhood stock?
Robinhood first found itself ascendant in late 2019, when some of the largest brokerages in the country began offering what Robinhood made its name for: commission-free stock and ETF trades. The company was credited for sending online brokerages on a race to the bottom in terms of price, while forcing them to maintain — and even improve — the services and experience they provided.
However, Robinhood has also endured public outrage and class-action lawsuits, settled a charge from the SEC for tens of millions of dollars, paid millions in fines and restitution and addressed a complaint from the Commonwealth of Massachusetts.
So where might Robinhood — and its stock price — go from here?
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Some things to consider before buying Robinhood stock
In choosing a name like Robinhood, there was no attempt to hide the company’s goal: to make the stock market accessible to everybody, not just to the wealthy. But some of the controversy surrounding Robinhood brings up the question of whether such accessibility — alongside gamification, misleading marketing and poor customer support — is actually a good thing. Some financial advisors suggest that any increase in accessibility to the stock market is a good thing; others see unintended consequences.
But if you believe in the company's mission and want to buy Robinhood stock (and yes, you could use Robinhood to do so), here are a few things to consider.
1. How Robinhood makes money
Believing in a company’s mission and purpose is a great prerequisite for choosing to buy its stock, but ultimately a rising stock price will come down to the company’s ability to keep making money over time. Currently, Robinhood has a few ways of doing this, including collecting interest on uninvested cash held in users’ accounts and charging $5 per month for its Robinhood Gold subscription, which provides access to margin trading and additional stock analysis.
But its largest source of revenue comes from the golden goose known as payment for order flow, through which large financial institutions (who actually match buyers and sellers to conduct a trade) pay Robinhood to send trades their way. This means Robinhood’s revenue is tied to volume: the more people are buying and selling stocks on the platform, the more Robinhood benefits financially.
Can the good times last?
While the current market climate may be serving Robinhood well, history has shown day-trading euphoria doesn’t always last. It’s easy to get excited about buying and selling stocks when the market is going up, says Todd Scorzafava, a certified financial planner and partner at Eagle Rock Wealth Management in East Hanover, New Jersey. But what happens when the market takes a sustained downturn?
“Any company out there has to stay relevant, they have to stay continuously giving what the public wants, or else the public will look elsewhere,” Scorzafava says. “Over time there will be cycles, and right now stock trading has been very popular. It’s front-page news. And it’s been front-page news in the past, and then eventually things rotate.”
What happens if the hot new trend turns back to real estate investing, as it did in the mid-2000s after the dot-com crash? Consider whether you think Robinhood can adapt to what the public will want over time and if the company can grow revenue amid any changes in that public demand.
2. Robinhood’s competition
Robinhood may hold the first-mover advantage in the world of free trading, but with most of the major online brokers having followed suit, will that be enough to sustain Robinhood’s success?
Robinhood has continued to innovate, adding features such as cash management, cryptocurrency trading, fractional shares and recurring investments. But it’s still a bare-bones trading app with no tax-advantaged retirement accounts nor access to mutual funds or bonds — products most of Robinhood’s competitors offer in addition to free trades.
According to Arvind Ven, CEO of Capital V Group, an investment advisory firm in Cupertino, California, one of Robinhood’s biggest competitive disadvantages at the moment is its reputation for poor customer service.
“In my opinion, the differentiator will be customer support. Many 'x-tech' startups seem to follow the playbook of even behemoth social media companies, where customer support is an afterthought or near nonexistent. Robinhood has been in the news recently for not necessarily the best reasons, including customer support issues,” Ven said in an email interview. “As a growing company on the road to adulthood, treating customer support with the importance that it deserves will be key.”
But Robinhood does have a few factors in its favor, namely the enormous, looming transfer of wealth set to take place in the coming years. As the largest living generation (millennials) begins to inherit the wealth of the second-largest living generation (baby boomers), that money is going to flow somewhere, and Robinhood likely will work hard to capture as much of it as possible. With a large millennial user demographic already established, the company could be well-positioned to benefit from that transfer of wealth.
3. What you can afford to invest in Robinhood
Once you’ve considered whether Robinhood has the fundamentals in place to generate revenue, grow its business and stay ahead of the competition — and you’ve decided you want to invest — buying its stock will be pretty straightforward. (Learn how to buy stock to get started.) You’ll need a brokerage account, and once that’s set up and you’ve linked your bank account, you can decide how much to invest.
Investing generally comes with inherent risk, but investing in individual stocks as opposed to highly diversified ETFs or index funds can add even more risk to the equation. If you’re interested in investing in Robinhood, or in any other individual stock, consider keeping the amount to a small portion of your overall portfolio, perhaps 5% to 10%, financial advisors suggest. It’s also a good rule of thumb to invest only an amount you won’t need for the foreseeable future, say five years.
For example, if you’re considering investing $500, but there’s a chance you might need that $500 in the near future, that amount might be too risky for you. But if you can live without that $500 for at least a few years and have additional cash to pay for anything that might come up in that period, you could say investing that amount is a calculated risk.
Be sure to look at your own financial situation to determine what amount is right for you.