Can Robinhood Markets Be A Millionaire Stock?

It’s probably appropriate Robinhood Markets (NASDAQ: HOOD) traded more like a stock meme in its first month on the public markets than like a heavy brokerage house. It is, of course, the online investing app that is most linked to the stock market frenzy that swept through the stock market earlier this year.

Yet Robinhood is not that different from E * Trade, TD Ameritrade and Charles Schwab. Although his fame came from the democratization of investing through commission-free transactions and no minimum account, he still has to follow the same rules of the SEC, exchanges and clearing houses.

This begs the question: if it’s pretty much the same as other brokerage firms, can investors hope to become millionaires by investing in Robinhood? Let’s take a closer look to find out.

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A shooting star

Robinhood went public in late July and quickly exceeded its offering price of $ 38 per share. After more than doubling in value in a few days, hitting $ 85 a share, it then slumped to around $ 40 a heel, where it is trading today.

But the price of a stock is not a good way to judge if it is a company in which you want to invest. You have to take a look at his activities, and Robinhood offers some hope.

At the end of the second quarter, the six-year-old brokerage said it had 22.5 million funded accounts, up 130% from the previous year. By comparison, Schwab, which was founded in 1971, said it had 32.3 million active brokerage accounts at the end of the quarter, the combined total between its namesake brokerage and the TD Ameritrade accounts it acquired. last October.

So although discount brokerage firms have been around for decades, it’s Robinhood that attracts new investors to the market. The online trading app reports that more than half of its funded accounts come from people opening their first brokerage account. Cumulatively, it has $ 102 billion in assets under management, triple the amount from a year ago.

Person looking at a stock chart on a mobile device.

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Leaving a bad taste

Robinhood had been popular with investors for quite some time, but it rose to fame when stock traders on the WallStreetBets subreddit started to rally to very short stocks such as AMC Entertainment and GameStop with the aim of raising their prices and causing a short squeeze.

Traders, however, were quickly doused with a bucket of cold water when Robinhood abruptly closed trading in the more volatile but popular stocks, first allowing traders to sell their stocks, then limiting buying to one or two actions only.

This move was immediately seen as a collusion between the hedge funds and the brokerage house. Robinhood’s biggest client, market maker Citadel Securities, is owned by the same financial services firm that owns the hedge fund Citadel Capital that was helping bail out Melvin Capital, which had bet big against the shares of GameStop.

While there are regulatory barriers between the hedge fund and its securities business – just as there are between Robinhood’s trading platform and its securities side – many believed that with billions of dollars at stake, these firewalls could be easily scaled.

The brokerage said its securities business had to make deposits with clearing houses to cover trades, but the extreme activity was pushing the limits of its available capital. Many felt that his reputation was tarnished by the episode.

Many traders soured on the brokerage house – whose unofficial motto was “Let them trade!” – although that doesn’t seem like a hindrance to Robinhood’s business.

Person looking at graphics on a computer screen.

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Risks abound

While the Kerfuffle has shown that there are even limits to Robinhood’s platform, a greater risk is that the SEC will ban how the brokerage house makes most of its money.

Since Robinhood does not charge investors for trades, it makes money by directing trades to market makers like Citadel in return for a portion of the profits made on each trade. SEC Chairman Gary Gensler recently said Barron that the prohibition against paying for the flow of orders is “on the table” because the arrangement presents a conflict of interest.

Robinhood also faces an influx of competition beyond the discount brokers. Square, for example, was the beneficiary of the dust on limiting stock trading during the height of the memes’ stock market frenzy (although he also had to limit trading), and Pay Pal is also considering getting into securities brokerage.

Robinhood recorded GAAP losses of $ 504 million, although Adjusted EBITDA was positive at $ 90 million, up from $ 63 million a year ago. This suggests that Robinhood may still grow, but it may take a long time for investors to become millionaires by buying its shares. It’s still a better bet than the latest stock of memes.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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