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Robinhood Stock Overview | What is PFOF? | Is Robinhood a Buy?

By BudgetHolics | Budgetholics | 28 Jul 2021

Hello everyone, welcome to BudgetHolics! In today’s video I go over Robinhood’s S-1 Filing and discussing the stock’s prospects.

Why do companies go public? Companies go public to get capital to fund their businesses. There are two ways a company may go public, either by a Direct Listing, i.e. listing themselves in the stock market, which is what Coinbase did, or via an Initial Public Offering, or IPO. 

Robinhood is an investment platform that has marketed itself as redistribution of wealth in financial markets by providing small, retail traders easy and commission free access to the stock market. The IPO is scheduled for Thursday (29/08/2021). The company will be sharing 35% of its shares through their IPO Access, which is a feature within the Robinhood App that allows users to buy shares of companies before trading on public exchanges. Listing on NASDAQ under the ticker symbol HOOD.

Businesses need to make money, they aren’t charitable foundations. When you’re not paying for a product, then you’re the product. People wrongly think that when watching free TV at home, they are the customers of the TV station and the program is the product they’re consuming. But this is false. In reality, you’re the product that TV stations are selling to advertisers. In other words, TV stations are selling access to large pools of customers for advertisers to market their product. And this holds even for subscription channels. This explains the occasional Starbucks cup that shouldn’t be at a medieval fantasy show.

Robinhood currently makes 75% of their revenue through Payment for Order Flow. When you place a trade on Robinhood, the platform doesn’t execute the trade itself. Instead, they route the trade through another company, called a market maker, which is usually a large hedge fund. Robinhood then gets paid by the market maker for routing the trades through them. When selling those trades, hedge funds can take opposing positions to retail traders, move the price of a stock or crypto in their favor due to their size and profit from it. In essence, they are selling users’ trading data to hedge funds, and this is why they were criticized during the GameStop Saga. In Q1 2021, PFOF accounted for 81% of Robinhood’s Revenue. More than 50% of Robinhood users are 1st time investors. They are unaware of how market manipulation or the PFOF model works. When 1st time investors place a market order, the hedge fund can charge them a higher price than what the stock is actually trading at. The PFOF model has come under scrutiny. The SEC is currently reviewing the practice with the possibility of an outright ban being on the table. In December, Robinhood was fined $65 million dollars to settle charges about misleading customers over payments from trading firms that overcharged users to execute transactions. Although this practice is illegal and Citadel was also fined $22 million by the SEC, hedge funds view it as the cost of doing business, given that their profits far outweigh their losses.

Other minor sources of revenue are interest payments for margin accounts and their gold subscription.

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Fin-tech & Crypto enthusiast. Interested in Investing, Personal Finance, and Wealth Building. I make educational content on all things finance, including Stocks, Cryptocurrencies, Budgeting and paving the way to Financial Independence!


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