LANSING, Mich. (WLNS) – You’ve probably heard of the stock trading app Robinhood. It made headlines earlier this year during Gamestop stock fiasco. How does it work? Is it a good investment tool? Local money expert Stephen Schiestel explains.
What is Robinhood?
Robinhood is an online trading platform. Users can buy and sell stocks and cryptocurrencies through the app with no additional costs. The platform can be accessed through a computer browser or the Robinhood smartphone app.
One of the things that makes Robinhood unique is that it offers “no cost trading,” said Schiestel. This allows traders to buy and sell stocks without having to pay commissions.
How does Robinhood make money?
The way Robinhood makes money has been the center of controversy.
Part of their revenue comes from “payment for order flow.” This means Robinhood directs their clients’ trades to another party to complete the transaction. This has been the center of criticism as some trades may be taken advantage of by bad-faith actors.
Why has Robinhood been in the news?
Robinhood restricted trading on GameStop and other stocks, such as AMC and Blackberry in January during the GameStop stock debacle.
Politicians from both sides of the aisle criticized this move, saying it favored big traders and disproportionately harmed small-scale traders.
Both Democratic congresswoman Alexandria Ocasio-Cortez and Republican Senator Ted Cruz denounced the move.
“We now need to know more about Robinhood’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,” said AOC in January.
The CEO of Robinhood spoke to congress in February, defending the trading platform.
Members of congress, especially Democrats, grilled Robinhood CEO Vlad Tenev over Robinhood’s actions.
The restrictions lasted in some form for days, and the incident fueled accusations that Robinhood changed its trading rules to favor its big Wall Street clients that stood to lose money if GameStop shares kept rising, reports the Associated Press.
Robinhood also caught flak after a 20-year-old college student and investor killed himself after mistakenly believing he lost over $700,000.
The student’s family sued Robinhood.
The Associated Press reported:
“(Alex Kearns) received emails from Robinhood shortly after 11 p.m. on June 11, informing him that his account was restricted and that he was required to buy $700,000 in shares as a result of an options trade, according to the lawsuit. That left Kearns’ account with a negative balance of $730,000 on a trade that he had understood would be limited to a maximum loss of less than $10,000, the lawsuit says”
The AP also reports that Kearns sent several emails to Robinhood’s customer support, but recieved only automated replies. He then received an email saying he needed to deposit $178,000 within a wee to address the balance.
“Tragically, Robinhood’s communications were completely misleading, because, in reality, Alex did not owe any money; he held options in his account that more than covered his obligation, and the massive negative balance would have been erased by the exercise and settlement of the” options Kearns held, according to the lawsuit,” says AP.