Wednesday 30 June 2021

Robinhood's IPO | How they changed trading/investing

Robinhood has been the trading platform being mentioned in many news as it attracts youths to create accounts with value as low as $100 which traditional banks/brokerages do not accept as customers. Robinhood actually filed for IPO on March 2021 and is said to go public in July 2021.

So before we talk more about it, let's find out more about Robinhood. It was founded by 2 Stanford graduates Vlad Tenev and Baiju Bhatt.I have seen Vlad Tenev appear in numerous videos especially after the GME saga where trading was halt and they had to explain why it happened. Robinhood was created in 2013 starting as an app for tracking stocks but was soon pushed out by Yahoo and Google finance so they pivoted into a brokerage after receiving some funding.

The pandemic pushed Robinhood into the limelight (nuggets from the video)

What Robinhood provided was the ease of creating an account to trade or invest where every aspect of the app was created to make the experience exciting from the fonts to being able to slide your finger across the graph and see the prices update. It attracted many users as the criteria to join was easily fulfilled and setting up was simple. It was mentioned in the video that even today with it's popularity, the median account size was $240 (USD) and in 2019, they had about 10 million customers.

One other attractive point besides the user experience and low criteria to start an account is the commission-free trading. I mean there has been a rise in low cost trading platform but Robinhood is definitely one of pioneers of it. The pandemic accelerated the growth of Robinhood as most people had to stay home where there was a surge of interest in investing. With these large numbers of sign ups, Robinhood had to find a way to monetise.

With social media platforms like Twitter, Reddit and Tiktok, the spread of information can go far and strong. With Robinhood collating the list of highly traded stocks combined with communities discussing on stocks, the young generation can invest at the snap of a finger unlike our parents where investing involves a broker and usually requires some time. In the past, offices in Wall Street run on news or what we call narratives (memes now) by passing on rumours on the next big stock and news only was in Wall Street over the phone but now, social media platforms allows such information to spread.

Short sellers and I really "like" the stock

Robinhood is a platform for retail investors to easily buy what they want without having too many criteria to fulfil. I am sure short selling, GME and AMC has been covered quite extensively so I won't go too deep into it but when Melvin Capital, a hedge fund lost billions after the epic squeeze by Reddit traders, the retail investors knew they have managed to find a way to go against the institutions who have all along been using ways to earn their share. And also bailing out themselves during times of crisis like the 2008 financial crisis where institutions could pay a fine while retail investors lost their lifetime savings or are required to pay for what the financial institutions caused.

All went well until Robinhood tweeted,"In light of current market volatility, we are restricting transactions for certain securities to position closing only, including AMC and GME." This means that you can only sell your stocks but couldn't buy more. This of course triggered anger among it's users who were a huge following against the hedge funds and not being able to buy was like stopping them in their fight against the institutions.

My Thoughts:

Robinhood actually had a pretty good reputation originally for the ease of using and onboarding, I am sure many who wanted to start investing created an account with them. However, after the GME and AMC buying halt by them, it was seen as a huge hit to their reputation as conspiracy theories that hedge funds were the ones who asked them to halt trading but Vlad clarified that it was entirely about market dynamics and clearing house deposit requirements as per regulations.

Robinhood still remains the easiest brokerage to onboard in the United States and I am sure many people are looking out for it's IPO. It also allows cryptocurrencies to be bought which is really convenient because you can have all your stocks and cryptocurrencies in one place. Although it is easy to onboard into Robinhood, they do have certain restrictions, for example, if you were to buy cryptocurrencies using Robinhood, you are not able to transfer it anywhere else. This makes you lose out in terms of interest and also safety as your cryptocurrencies depend a lot on Robinhood's infrastructure. All in all, it will be interesting to look out for the IPO but I will not be initiating any position on it. Hope you guys enjoy the content. Mid year portfolio review coming soon.

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