Learning how to buy stock can seem overwhelming if you’ve never purchased an investment before. Thankfully, companies like Robinhood have made it easier than ever to start with stock trading and building an investing habit without paying commission fees or needing $1,000 to open an account.
But should you buy stock in a financial services company that makes it easier to start investing in other stocks? We’ll take a look at buying stock in Robinhood to help you determine if it’s a good fit for your investment plan.
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Robinhood was founded in 2014 by Baiju Bhatt and Vlad Tenev in Palo Alto, California. The pair realized that large brokerage firms paid virtually nothing to trade stocks, but individuals were often charged commissions for each trade. They built Robinhood as a commission-free trading platform with real-time data to give more people access to trade stocks.
When Robinhood launched, it was a novel concept in the fintech industry. As the company grew, competing brokerages took notice. Slowly, many major brokerage firms started lowering or eliminating their fees to trade stocks. This gave more people access to trade stocks and took away the competitive pricing edge Robinhood had used to gain new customers.
Robinhood is owned by its shareholders, the largest of which are mutual funds and investment companies. For instance, ARK Investment Management LLC owns a 4.10% stake, and ARK Innovation ETF owns 2.71% of the company. Vanguard’s Total Stock Market Index Fund owns 2.18% of Robinhood, and their Small Cap Index Fund owns 1.88% of the company.
Robinhood started trading on the NASDAQ in July 2021 with the stock symbol HOOD. As of May 2, 2022, Robinhood’s stock price had fallen from its initial public offering (IPO) price of $38 to $9.89, a nearly 74% decline.
By comparison, as of May 2, 2022, the NASDAQ had declined from its opening price of $14,758.60 on August 2 2021 to $12,365.54. This represents a 16% decline, which is relatively small compared to Robinhood’s drop. Although Robinhood’s steep decline may worry some investors, the company has faced challenges in a declining stock market.
Robinhood hasn’t stopped innovating, though. The company plans to widen its investment options to include retirement accounts. This could open up the company to new potential investors who only invest for retirement in tax-advantaged accounts, such as Roth IRAs. Robinhood is also looking to add the ability to trade 24 hours a day, seven days a week.
Demographics may also play a huge role in Robinhood’s growth moving forward. The company is attracting customers in the millennial and Gen Z age groups. These investors may not have much money to invest now but may inherit wealth and have more money to invest in the future.
While Robinhood has grown tremendously and introduced a more cost-effective way to trade, the company has faced significant scrutiny from customers and regulators for its past actions.
In 2021, the Securities and Exchange Commission (SEC) fined Robinhood $65 million for misleading customers. The Financial Industry Regulatory Authority (FINRA) also issued a fine of $70 million against Robinhood for operational and regulatory issues, the largest sanction imposed by the organization to date.
In particular, FINRA cited issues regarding how Robinhood allows some investors to trade on margin, or use debt to invest. Additionally, the company has faced several major outages during huge stock swings. During this time, customers could not access their accounts to buy or sell stocks.
In January of 2021, Robinhood restricted investors from buying stock companies such as GameStop, AMC, and Nokia with CEO Vlad Tenev citing market volatility. The freeze was criticized as targeting small traders in favor of Wall Street investors.
Without the ability to trade, customers could have missed out on selling early to protect their investments to compensate for market volatility or buying more to bolster their positions during market upswings. These issues have made Robinhood appear unreliable while other brokerage firms operated as normal.
Buying Robinhood stock shouldn’t be too hard if you know how to invest in stocks in general. The traditional route involves buying full shares through a brokerage account. Still, those who don’t want to own a whole share have other options.
Traditional brokerage accounts allow you to buy and sell shares of stock. If you don’t recognize the term brokerage account, you’ve likely heard of plenty of companies that offer them. Brokerages include companies like Vanguard, Fidelity, Charles Schwab, and more.
Brokerage firms usually allow you to have a variety of investment accounts. For instance, you could open a Roth IRA, traditional IRA, or another type of tax-advantaged account. Once you open an account, you’ll need to add funds so you can purchase shares of Robinhood. Then, simply place a buy order for the number of shares you want to purchase to start investing in Robinhood.
Using a traditional brokerage firm has benefits and drawbacks. These firms are mostly large brokerages that have been around for decades. As such, they mostly have solid foundations and offer several products and tools for investors. They also control massive amounts of investments through the mutual funds they offer.
Unfortunately, large brokerage firms aren’t always up-to-date on the technology side of things and may be less user-friendly than some of the best investing apps. They’re also often slow to adopt new trends, can be more difficult to sign up for, and may require minimum investments for certain products.
Check out our guide on how to choose a brokerage firm.
If you’re not ready to buy whole shares of Robinhood, you can purchase parts of a share, called fractional shares. Fractional share investing can be an attractive option for new investors without a lot of money to invest.
Before fractional share investing, you’d have to buy a whole share of a company you wanted to invest in. Since some stocks cost $100, $1,000, or more per share, you’d have to save quite a bit of money to invest in them. Even after you bought one share, you likely wouldn’t have a well-diversified portfolio.
Fractional share investing allows you to invest the same amount of money in several companies without worrying about share prices. If you have $100 and want to invest in 20 companies, you could invest $5 in each company with fractional shares. This can help you diversify your portfolio without having to save up hundreds of dollars to invest.
Stash is a mobile app that allows you to start buying fractional shares of stocks like Robinhood, Apple, Amazon, and Tesla. That means if a stock had a $10 stock price when you bought it and you invested $1 through Stash, you’d get one-tenth of a share. The app supports individual stocks, exchange-traded funds (ETFs), bonds through ETFs, and more.
…or read our full Stash review.
Deciding how to invest money, including in stocks such as Robinhood, is an extremely personal choice. It's a good idea to evaluate the stock to see if you feel it has room to grow and look to see where it fits in your investment plan overall.
People who believe in Robinhood’s vision and execution may want to consider investing in the stock. The company has added new features to its investment platform and has plans to continue introducing important features in the future. The stock’s large price decline since its IPO may give investors a chance to purchase shares at a lower price if they believe the company has a bright future.
On the other hand, you may see Robinhood as a company that was initially innovative but may not be able to compete with the bigger brokerages. If larger brokerage firms adapt their business models to match what Robinhood aims to do, Robinhood may not be able to increase its market share in this competitive industry.
To help you determine whether investing with Robinhood is good for your situation, you may want to meet with a financial advisor. They can help you create an investment plan and help you decide if Robinhood stock is part of that plan.
Whether Robinhood stock is a good investment depends on your outlook on the stock and your investment goals. The stock price has steadily declined since its IPO. People who believe in the services Robinhood provides may believe the company has a bright future.
You could evaluate the company’s public earnings reports and read stock analysts' opinions to learn more about the stock. You can then form your own opinion about whether Robinhood is a stock that’s a good investment based on your goals.
Stocks vary in price based on a number of factors that make predicting their future price impossible. Robinhood started trading in July 2021 and doesn’t have a long history to make a guess at its future stock price based on past performance. However, the stock’s price has declined by almost 74% in less than a year since it started trading on the NASDAQ exchange.
If you were able to buy Robinhood IPO stock at $38 per share, you would have been able to buy 26.32 shares of Robinhood with $1,000. As of May 2, 2022, Robinhood’s stock price was $9.89. Based on this stock price, an initial $1,000 investment in the company would be worth $260.30.
If you want to buy a full share of Robinhood, you’d need to pay the current share price of about $10 to buy the stock (as of May 2, 2022). Thankfully, some trading apps allow you to buy fractional shares of stocks like Robinhood for much less. This means you’ll only own part of a share, but you can always buy more in the future to accumulate one or more whole shares.
If you feel the future is bright for Robinhood based on their plan to release new features, this lower entry point into the stock could be a good fit. You may want to check out the best brokerage accounts if you want to start investing in the stock right away.
However, you may decide investing in Robinhood may not be a wise choice if you believe bigger brokerage firms will adapt to Robinhood’s market moves. In this case, you may decide to invest your money elsewhere.
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This article How to Buy Robinhood Stock (And is It a Smart Investment?) originally appeared on FinanceBuzz.
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