Robinhood trading app is expected to go public on Thursday

Robinhood trading app is expected to go public on Thursday

Robinhood will begin offering its stocks on Wall Street on Thursday, the very place where online brokerage rocked its stated goal of democratizing finance.

Through its app, Robinhood has empowered millions of people to invest in and reshape the brokerage industry, while racking up a long list of controversies in less than eight years.

Robinhood Markets and three of its executives are selling up to 60.5 million shares in an initial public offering, trading to begin on the Nasdaq under the symbol “HOOD”.

It was listed on Wednesday night at $ 38 per share, the low end of its expected range of $ 38 to $ 42, indicating mixed investor interest.

Still, it’s a huge time for the fast-growing Menlo Park, Calif., Company, which reserves a large chunk of the stock for its own clients, rather than just large professional investors. Can Robinhood convince them to adopt his stocks, just as he helped a generation of investors trade stocks, options, and cryptocurrencies?

Here are a few things to keep in mind ahead of one of Wall Street’s most anticipated IPOs this year:

If it’s free, how do they make money?

Robinhood’s revenue soared 245% last year to reach US $ 959 million. It then hit $ 522 million in the first three months of 2021 alone, more than quadrupling from last year’s level.

Robinhood doesn’t charge trading commissions and doesn’t require clients to have big balances, one of the reasons it’s so popular. He earns most of his money – 81% of first-quarter revenue – by channeling investor orders to large trading companies, such as Citadel Securities, which take the other side of the trade. They also give Robinhood a payment.

The practice, called “payment for the flow of orders”, has drawn criticism from lawmakers and regulators. The head of the Securities and Exchange Commission questioned whether this is preventing investors from getting the best possible price for their trades and whether it is causing brokerage firms to encourage clients to trade more frequently than they should.

But legal experts say tighter regulations can be difficult to put in place. Brokerages have to make money somehow, and if Robinhood can’t get it through order flow payment, it could start charging trading commissions again, Joshua said. Mitts, professor of law at Columbia University. It could make politicians even less popular than they already are.

“I think investors are taking this into account in a lot of ways,” Mitts said, “and there’s a pretty good feeling Robinhood will be fine.”

What if trading slows down?

Even if the order flow payment persists, Robinhood’s reliance on the practice could be an issue. Normally, Robinhood can make about 75% of its money from transaction-based income, about triple what some competitors get, said Tom Mason, senior research analyst at S&P Global Market Intelligence.

Robinhood earns an average of 2.5 cents for every $ 100 traded. This means that he stands to lose if users start trading significantly fewer $ 100 blocks on his app.

Robinhood says its revenue could drop in the July-September quarter compared to the April-June period, when revenue increased from around 124% to 135%. Besides seasonality issues, Robinhood said he expects levels of trading activity to decline, especially in cryptocurrencies, which accounted for 17% of revenue in the first three months of the year. . Prices for Bitcoin and other cryptocurrencies have generally been down since the April peak.

Among other risks, Robinhood customers could spend less time on the app if a pandemic wears off allows them to get on with their lives and do other things with money.

Robinhood has also not always satisfied customers: its platform has experienced high-profile outages, and earlier this year it temporarily banned investors from trading on GameStop, when the manic movements of its customers. stocks were the talk of the market. This may have played a role in the roughly 600,000 customers who emptied their accounts in the first three months of the year. The company has 18 million funded accounts.

Offsetting all of this was the strong brand Robinhood created which allowed the company to attract new customers without spending too much on marketing. And Robinhood’s advantage over its competition is an intense focus on customers, which pushes it to roll out in-demand products very quickly, S&P’s Mason said.

What Happens Your Customers Become Your Investors?

Robinhood takes the unusual step of allowing users of its trading app to buy up to 35% of its IPO shares before they start trading. This is by far the largest portion of the pre-IPO stocks to be designated for retail investors in a subscribed offering, said Matt Kennedy, senior IPO market strategist at Renaissance Capital.

Typically, only institutional investors and company insiders can buy shares in companies before they go public, and ordinary investors miss out on day one. Between 2001 and 2020, the average U.S. IPO earned 14.5% of the offer price on day one, according to Renaissance Capital. The return this year is even better by 25 percent when you look at IPOs that raise at least $ 100 million.

The biggest risk, according to Kennedy, is that retail investors are more likely than institutional traders to flip stocks for a quick profit, which increases the possibility of increased volatility on the first day of trading. For its part, Robinhood warned that users who sell IPO shares within 30 days of the IPO will not be able to purchase shares in IPOs on Robinhood’s platform for 60 days.

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