Robinhood shares soared by over 80% at one point on Wednesday. In a rollercoaster session, trading of its shares was halted several times due to volatility. By the end of the day, it closed off its highs, but still up by 50%.
The online share-dealing broker listed on the Nasdaq stock exchange just last week, but initial investor appetite was lacklustre. It also listed at the lower end of the anticipated price range.
However, interest in Robinhood shares picked up this week. At the time of writing, its share price had almost doubled since Monday.
Why are Robinhood shares soaring?
It’s unclear why there’s been a sudden surge in interest in the shares. There’s no apparent news from the company or industry. That said, there are several potential reasons why the shares could soar.
Speculative targeted activity from online chat rooms could be a possible cause. Earlier this year, heavily-shorted stocks like AMC and GameStop experienced similar volatility when their shares were targeted online.
Ironically, Robinhood was caught up in the drama at the time when it was forced to halt trading in the two stocks.
Some traders may also have gained confidence after seeing popular investor Cathie Wood buying Robinhood shares on Tuesday.
The popular trading app
Robinhood was launched in 2013 and has become popular with a younger demographic. It appealed to new traders and investors with fee-free trading and fractional shares. According to Robinhood, more than half of its customers are first-time investors.
Robinhood’s mission is to “democratize finance for all”. The ethos that everyone should have access to financial markets became particularly popular with its target market.
But how does it make money? As it doesn’t charge users for transactions, it needs another source of income. Much of its revenue comes by selling order flow and data to third parties. It also earns by charging interest on users’ cash and by offering premium services.
Should I buy Robinhood shares?
For me, Robinhood shares are currently far too volatile. I prefer to buy shares that don’t fluctuate so much every day. That said, the popular trading app is growing fast. Total revenues grew 309% to $522m in the second quarter of 2021 vs the same period in 2020.
Also, its easy-to-use app is designed for mobile users first and provides an intuitive experience. It’s not hard to see why the technology-focused broker is popular with young, tech-savvy investors.
And it looks like there are many avenues for future growth. For instance, by adding users in the US and expanding internationally.
However, I think its recent growth has come in a short period of time. It has limited operating experience and there is much room for error when growing a fast-moving business. Also, keeping up with and not falling foul of regulators is a critical factor in this industry. Any major regulatory mistakes could negatively affect Robinhood shares.
Overall, I can see far better growth shares that I’d rather invest in so I won’t be buying Robinhood shares anytime soon.
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Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.