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Robinhood IPO: what potential investors need to know

Robinhood has recently announced its IPO. It offers a commission-free trading model. We look at what investors need to know.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Robinhood is planning an Initial Public Offering (IPO). It’s a US based commission-free stockbroking and cryptocurrency trading service.

The company has published its prospectus and plans to trade on the NASDAQ using the ticker HOOD. The IPO is expected to price on 28 July with a price range of $38 - $42 per share. This would value Robinhood at around $35 billion. Robinhood’s shares are expected to start trading on the market the following day.

The Robinhood IPO could drive a lot of interest from potential investors, both in the US and the UK.

The company launched in 2013 to take on established names. 18m people now use its services, with the company claiming half of all new US investors since 2016 choose to invest through its service.

Robinhood also became a central figure in the Reddit-driven stock frenzy back in January.

This gave it a lot of media coverage. But the company also came under the regulatory spotlight. That attention could have a big impact on Robinhood’s future potential as an investment.

We take a look at why.

How does Robinhood make money?

Robinhood doesn’t charge investors a dealing fee. It puts clients' trades through certain companies and, in return, these companies pay Robinhood a fee. It’s these fees that make the company most of its money.

It’s called “payment for order flow”. And even though it’s a tiny fraction of a cent per share traded, it soon adds up.

Over the last year Robinhood made $720m from payment for order flow – three quarters of its total revenue. That rose to 81% of revenues in the first 3 months of this year.

Robinhood aren’t the only firm to accept payment for order flow in the US. But this model’s now coming under more scrutiny.

The US regulator, the Securities and Exchange Commission (SEC) plan to review stock market trading rules. This could include payment for order flow.

The question is whether it stops investors from getting the best price for their deals, creating a possible conflict of interest between firms like Robinhood and their clients. Firms promise to trade at, or at better than, current market price. But was a better price available with someone else?

This is a big worry for Robinhood’s revenues and potential investors in the company. It was enough for Robinhood to highlight a potential ban on payment for order flow as a key risk in its prospectus.

Other Robinhood regulatory concerns

This isn’t the first time Robinhood has come under fire from US regulators.

In December last year, the Massachusetts securities regulator accused Robinhood of gamifying investing. It said Robinhood encouraged regular buying and selling using notifications, rewards and incentives. The case included a customer, with no investment experience, who traded 12,700 times in six months.

More recently, the US Financial Industry Regulatory Authority fined Robinhood a record $70m. It said the company had caused “widespread and significant harm” to investors.

And there could be more on the horizon. The Robinhood prospectus named seven US state and federal bodies investigating the company.

How else does Robinhood make money?

The next largest contributor to Robinhood’s revenues is net interest revenues. These include revenues from stock lending and interest earned on margin lending and clients’ cash deposits.

Stock lending is when companies lend its customers’ shareholdings to another firm. In return they'll get paid a small percentage. This could be to the company borrowing them to sell, in the hope of buying them back at a cheaper price in the future.

Margin trading is when a company allows its clients to borrow money to pay for their trades. The company will charge interest on the money borrowed. And it’s a high-risk way to invest.

Gains and losses on the original investment can happen very quickly. Investors could lose more money than they put in and end up owing more than they put in.

For example imagine you had £100 and borrowed another £900 to buy £1,000 worth of an investment. If the total value of the investment fell to £750, you’d have lost the money you put in and a further £150, plus any fees.

Does HL lend stock or payment for order flow?

No. HL doesn’t lend your investments out to other firms, we don’t margin trade and we don’t accept payment for order flow. In fact, it's against UK rules to accept payment for order flow.

This could be why Robinhood cancelled plans to launch its service in the UK last year.

We believe people should invest for the long term. Investing isn’t about gambling your money on a few hot stocks. It’s holding a mix of investments in the expectation that after 5-10 years you’ll make a profit. Though there will be some bumps along the way and no returns are guaranteed – you could get back less than you put in.

How to buy Robinhood shares

UK investors can’t take part in the Robinhood IPO. But they should be able to buy Robinhood shares once they start trading on the US stock market. We expect this to be on 29 July.

Investing in an individual company is higher-risk and isn’t right for everyone. Your investment is dependent on the fate of that company. And like all investments, its value and any income it pays will go up and down.

If the company fails, you risk losing your whole investment. So, it's important any shares are part of a well-balanced, diversified portfolio. This can help reduce risk, as some investments will perform better than others. But you could still get back less than you put in.

If you believe in the long-term prospects for Robinhood and want to buy the shares, here are the steps you’d need to follow:

  1. Choose an account to hold your shares in

    Once listed on the stock market, you can hold Robinhood shares in our Fund and Share Account, HL Stocks and Shares ISA or Self-Invested Personal Pension (SIPP).

    Before you buy your first US share with HL, you’ll also need to complete a W-8BEN form.


  2. View the latest share price

    On the first day of trading, it can take several hours to get a live market price. During this time, it isn’t possible to buy or sell the shares.

    Investors will be able to deal the shares through HL once there’s a live market price, and trading and settlement has been confirmed by the UK clearing and settlement service. This could be after the shares have already started trading on the stock exchange.

  3. Buying Robinhood shares

    We’ll show you the live Robinhood price in both US dollars and sterling. You can then choose to accept the price or not.

    That’s it. Your shares will be held in your account. You can see how they’re doing and deal whenever the US market is open, online or with the HL app.

What are the costs?

There are three charges when buying US shares with HL.

Dealing charge: It costs up to £11.95 per trade to buy and sell US shares online. You can also deal over the phone or by post from £20 – £50 per deal.

Foreign Exchange (FX) charge: US shares are bought and sold in US dollars. You don’t need to hold a foreign currency account. We’ll convert the money in your account into US dollars to pay for the shares. When you sell, we’ll convert the proceeds back into pounds for you.

The cost will depend on the value of your deal, up to 1% per deal. Changes in the exchange rate will affect the sterling value of overseas holdings.

Annual charge: there’s no annual charge to hold US shares in the Fund and Share Account. It costs up to 0.45% per year to hold shares in an HL Stocks and Shares ISA or SIPP (capped at £45 per year in the ISA and £200 per year in the SIPP).


Our share dealing service is for investors happy making their own investment decisions. You should speak to a financial adviser if you’re not sure if an investment is right for you.

What did you think of this article?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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