Robinhood IPO: Should you invest? Here's what to know. - USA TODAY
Robinhood, the wildly popular online trading platform that's known for enticing small-time traders to invest in the stock market, made its public debut on Wall Street Thursday.
The financial services company, which fueled a number of meme stock trading frenzies in the past year, was valued at around $32 billion in a hotly anticipated initial public offering.
Robinhood trades under the ticker symbol HOOD, was priced at $38 per share and the company was able to raise close to $2 billion after selling its stock, according to CNBC.
The trading app was founded in 2013 and has been the brokerage of choice for legions of online day traders. It has more than 20 million users, according to its Securities and Exchange Commission registration statement, and built its business on the motto of "democratizing finance."
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Typically, individual investors can’t get their hands on shares before they hit an exchange. But Robinhood, in an unusual move, urged its own customers to invest in its shares and reserved up to 35% of shares for its app users.
That will test the loyalty of young investors that it's convinced over the course of nearly a decade to jump into stock trading.
To be sure, Robinhood warned investors that it could become a meme stock itself. Some investors have been hesitant to jump in after the brokerage warned in its IPO registration that the participation of retail investors could add to a wave of volatility.
If you're looking to jump in, here's what to know about Robinhood's IPO:
How can you buy Robinhood stock?
An IPO typically works like this: A private company goes public by offering its shares to the general public. Then that allows a company to raise capital from public investors.
A unique aspect of Robinhood's rollout is that it shared up to 35% of its IPO shares with its customers. In a virtual roadshow Saturday where the company fielded questions from individual investors, Chief Executive Officer Vlad Tenev said that it would likely be one of the largest such allocations to retail investors ever.
Shares can be bought through Robinhood’s IPO Access feature where customers can indicate their interest in buying shares and confirm eligibility, but not every customer who wants to buy shares will be able to.
After the price was set, customers found out if they would be able to buy stock. Customers were randomly chosen. Then those picked were notified and they could confirm, edit or cancel their request.
Should you invest in Robinhood?
The trading app came under scrutiny after clashing with SEC regulators over allegations that it misled customers and exposed them to risky trading tools. Robinhood was ordered to pay nearly $70 million to resolve the dispute, the largest penalty ever issued by the Financial Industry Regulatory Authority, Wall Street’s self-regulatory arm.
Robinhood also faced criticism over the death of Alex Kearns, a 20-year-old customer who killed himself after believing he lost a significant amount of money on the trading platform.
David Erickson, senior fellow and lecturer at the Wharton school of business, said that while Robinhood shows promise, there are some inconsistencies in their performance, citing their recent $70 million fine.
He also believes Robinhood doesn't have enough experience dealing with the SEC or other financial regulators and advised that investors should wait things out at first before piling in.
"Robinhood is not a must-own company, it's not a must-own stock. I think a lot of investors are going to pass on the IPO and see how it trades, and maybe down the road they'll invest," Erickson told USA TODAY.
While James Angel, associate professor at Georgetown’s school of business, acknowledged some of the company’s risks, he didn’t believe they were as impactful and said it falls under "typical Silicon Valley behavior."
Angel, who has used Robinhood, believes it has opened up investing to a younger demographic which would not have had access otherwise.
Before making any investment, Angel noted that it's important for investors to consider what type of investment they want to make, whether it's for the long term, or if they are looking for a quicker turnaround instead.
Investors should consider their investment goals, opportunities and current financial circumstances before making any decisions, he added.
What's next for Robinhood?
Financial professionals will be looking out for overall market trends alongside how Robinhood is doing, as well how successful the online trading brokerage will be in rolling out other financial services, Angel said.
Others, like Erickson, will monitor how Robinhood allocates the shares the company said it would reserve for its customers.
"That's a real unknown given the fact that they’ve never allocated any IPOs, much less their own IPO, or a big percentage of it." Erickson said.