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Based in California, Robinhood Markets Inc. is a financial services company that provides an online investment platform to its users (31 million as of 2021) for trading in various types of listed securities and exchange-traded funds without charging any commission. The platform also lists down several other facilities like high-yield cash management offerings, margin trading, and access to initial public offering (IPO) investments. The company is a FINRA-regulated broker-dealer and is registered with the US Securities and Exchange Commission. Moreover, it is also a member of the Securities Investor Protection Corporation.
Robinhood stock went public on July 29 this year and since then has gained about 15.7%. However, despite having a successful trading platform, Robinhood stock is not an investor favorite.
Why Robinhood Is A Good Trading Platform But A Bad Stock To Buy
Why Robinhood is considered as a good trading platform:
Easy to use
Robinhood’s platform has quite an easy interface and can purposefully meet the requirements of basic investors. The platform has a tab bar at the bottom which provides quick access to portfolio values, watch lists, transaction history, and account statements. Robinhood organizes stocks either by sector or by category, and also supports market orders, limit orders, stop limit orders and stop orders. The collections can be sorted further and users can compare stocks side by side. Moreover, the platform is built for the mobile phone screen which makes it a millennial favorite.
Easy Account Opening
Opening trading accounts is quite a bulky and time-consuming process as it often involves a lot of formalities. One of the biggest reasons for using the Robinhood platform is the hustle-free account opening process provided by the company. The entire account opening process is pretty seamless and does not involve depositing any form of money. Also, the process is entirely digital and can be completed within a single day itself. However, only US citizens are allowed to open their accounts as of now though the company is planning to expand to Europe and other countries soon.
Multiple tradable securities
Trading multiple securities through a single platform itself makes the entire trading process much easier for any investor as one does not need to juggle through multiple platforms and accounts and as a result end up saving a lot of time, effort and money. The Robinhood platform is one such platform that supports multiple tradable securities. The platform supports a range of securities like stocks, ETFs, options, cryptocurrencies, American Depositary Receipts for over 250 global companies, as well as Fractional shares. Therefore, investors who usually deal with multiple kinds of securities can also avail themselves of the Robinhood platform.
Robinhood is one of the most standard and affordable trading platforms available for investors. The platform comes with a very transparent fee structure. Trading on the Robinhood platform is indeed pretty cost-effective as it does not require any kind of deposit fees at the time of account opening and also allows free trading of US stocks, options, exchange-traded funds, and cryptocurrencies. Also, the broker doesn’t even charge any inactivity or withdrawal fees. However, to avail other services one needs to pay a small amount of money. Though other services are chargeable investors can save a ton of money by making commission-free trades.
Reasons for which the Robinhood stock is not a buy
Not so good financials
Robinhood has kind of a mixed financial performance. This year to date it has already recorded a net loss of $1.9 billion and holds $17.9 billion of liabilities under its kitty. Its operating income of $122.9 million got eaten up by the over $2 billion the company had expended on its convertible notes and warrant liabilities. Though its revenues are steadily increasing over time, it still needs to go a long way in order to bring its high debt-equity ratio under control.
Bad Market Reputation
Robinhood is a zero-commission platform, but it earns margins from the dealers instead thereby misleading the customers and making them pay more for their trades without their knowledge. This practice of charging higher prices behind the scene did not go well with SEC and it condemned this practice and also fined Robinhood $65 million for fooling its customers about its revenue model and another $70 million for poorly screening inexperienced customers and letting them go for options trading. Because of this inadequate and inefficient policy, many new investors have lost their money with the Robinhood platform thereby creating a bad reputation for the company in the minds of the users.
Excessive focus on Options Trade
Options trading is difficult for most investors as it possesses an unlimited risk of financial losses. Robinhood’s revenue is dependent on the options trade to a large extent. In its first quarterly report of this year, the company reported options trading to make up a whopping 38% of its total revenues i.e. the company had made $2.90 for making each options trade while for trading in equities it had charged only $0.40 per trade. Due to this policy, many inexperienced investors also get attracted to trade those risky securities and, in the process, end up losing a lot of money on a single trade itself.
Robinhood is a solid trading platform and is one of the most famous brands in the brokerage market. More than half of its customers funding its account have stated that Robinhood was their first trading platform. Owing to the seamless account opening measures and an easy-to-use interface at a competitive price, the platform can be useful indeed for most beginner investors. However, one should remember before buying this stock that the company is currently facing intense scrutiny from both public and regulatory authorities and also has a quite risky business strategy and a not-so-good balances sheet position. Moreover, due to the current bad name in the market, it may experience fewer trading activities which might worsen its already unstable financials. Therefore, it might be better for investors to use this as a trading platform only as of now rather than purchasing its shares.