Although day trading is not a new phenomenon, Robinhood’s approach revolutionized how investors participate in the stock market. By charging no fees on trading, Robinhood attracted a class of investors that proved resistant to traditional investment services – millennials. Demanding faster response times and great ease-of-use, recent generations flocked to Robinhood and their mobile app. That targeted focus continues to pay off, as the startup recently completed a $200 million Series G funding round at a valuation of $11.2 billion.
The third major funding push for Robinhood in 2020, this round brought in D1 Partners – a New York-based investment firm. The sudden spike in valuation comes alongside the global coronavirus pandemic. In fact, Robinhood witnessed record trades throughout the course of the pandemic and associated lockdown, which beat out even the traditional brokerages. Given a considerable uptick in market volatility, many investors are rushing to buy stocks at perceived low prices – resulting in a large increase of user accounts.
Robinhood: Game Changing Features
Robinhood’s killer feature remains fee-less trading. Leveraging their high volume of trades, Robinhood can make lucrative agreements with market makers. These third-party entities pay to fulfill orders, creating considerable profit despite a lack of direct commissions from users. As Robinhood brings more services online, some offer even higher profitability – mostly in their relatively new options trading.
Beyond that, Robinhood’s user interface and mobile availability put them considerably ahead of traditional alternatives. Through their trade simplification, they have attracted 13 million active users – most of which are day traders. This bodes well for continued profitability, with a majority of users choosing constant turnover, as opposed to long-term growth.
Growing Pains and Lessons Learned
Unfortunately, Robinhood’s meteoric growth did not come without a degree of turbulence. Earlier this year, a 20-year old user named Alexander Kearns managed to rack up $730,000 in debt on Robinhood. Through the app’s options trading service, he lost far more money than he had – and in his eyes, more than he could ever earn. Alexander Kearns committed suicide on June 12, 2020, leaving behind a note that asked,
“How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?”
In response, Robinhood vastly increased their safety systems to prevent this scenario in the future. While they may now understand the gravity of their position towards new investors, this is not the first time someone managed to occur a major loss through the app. Early last year, a user managed to cause a 2000% loss on $5,000, after a massively leveraged box spread options trade went sour.
Article By: Adam Stone