Brokerage accounts like Robinhood have grown increasingly popular in recent years. In fact, Robinhood is a big draw for new investors because it lets them buy stocks and not pay commissions on a per-trade basis. Those commissions can eat into investors' profits, so avoiding them is a good thing.
But Robinhood had a rocky start to the month of August, and much of that has to do with the platform's initial public offering (IPO). If you use Robinhood, here's what you need to know.
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What happened to Robinhood stock?
An IPO takes place when a private company decides to go public and offer up its stock to investors. Robinhood had its IPO on July 29.
At first, the results of that IPO were disappointing, with Robinhood shares falling below the initial IPO price. But then investors scooped up Robinhood shares at a rapid clip, driving up the price. The rally was so intense that the trading of Robinhood stock was temporarily halted on Aug. 4. By Aug. 5, Robinhood shares had plunged, but they crept back up again the day after.
Should Robinhood users be worried?
Late last week, Robinhood was forced to tap lines of credit and raise new debt to ensure it had enough capital to clear trades as they came in. The fact that the company had to seek out emergency financing is something investors in its stock should rightfully be concerned about.
What's also concerning is that a number of venture capital firms that invested in Robinhood early on were quick to unload their shares. It's not unusual for venture capital firms to cash out shares once a company they've invested in goes public. But it's also a sign that those investors believed Robinhood's rally was temporary -- and that they wanted to get out before share prices dropped even more.
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All of this means that it's a precarious time to invest in Robinhood stock. But if you're simply someone who uses the Robinhood platform, that's a different story.
It's true that Robinhood has faced its share of lawsuits related to halting trading during a series of meme stock rallies earlier this year. But the company remains a popular platform for trading -- and users and investors are likely to stay loyal. So if you use Robinhood as your brokerage, there's no reason to rush and pull your money out.
We don't know what the future holds for Robinhood's stock price or what regulatory changes may be coming in light of the company's ongoing legal battles. Chances are, though, if new trading regulations are enacted as a result of Robinhood's actions, they won't apply to Robinhood solely, but to all brokerages.
If you've been happy using Robinhood so far, there's no reason to find another brokerage just yet. But you may want to hold off on buying shares of its stock until trading cools off.
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