Investing in the stock market can be a great way to make some extra money, but it can also be risky. For example, when the news broke that Sam Bankman-Fried had bought a 7.6% stake in Robinhood shares, the stock price increased by more than 20%. This news generated a lot of interest in this company and potential investors began to wonder if they should buy Robinhood shares.
While Robinhood may potentially increase your wealth, certain risks are associated with investing in this particular company or any stock. Before making an investment decision, it is important to understand these risks to feel confident about your choice. This guide will explain some of the key risks associated with buying Robinhood shares and provide tips on minimizing these risks when purchasing stocks.
Robinhood shares pop more than 20% after Sam Bankman-Fried buys 7.6% stake
Robinhood is a US-based financial services company headquartered in California, providing commission-free stock and options trading from mobile devices. The platform gained notoriety in the late 2010s as it lowered restrictions and charges for trading, allowing people to trade stocks without an account minimum balance or yearly fee.
Robinhood grew in 2020 due to increasing interest in day trading during the COVID-19 pandemic. Robinhood had 13 million users as of November 2020, an increase of 5 million since December 2019. In February 2021, billionaire Sam Bankman-Fried bought a 7.6% stake in Robinhood shares and at the same time increased the share price by more than 20%.
So if you’re considering buying into Robinhood shares, there are some risks associated with this decision that should be considered:
- Robinhood trades are inherently risky because of their high volatility; you could stand to lose your entire investment if the market moves against your expectations.
- This type of investing is not accessible for beginners and requires knowledge of market trends and understanding how algorithms work; if you don’t meet these criteria you may not want to invest.
- Although there is no commission fee when trading on Robinhood, fees can still add up when taking deposits and withdrawals from accounts.
Hence, it’s important to double check those before making any decisions about investing.
What are the risks of buying Robinhood shares?
With Robinhood shares popping more than 20% after Sam Bankman-Fried recently purchased a 7.6% stake, investors may also be tempted to buy in. However, there are risks associated with buying into these stocks and it’s important to weigh them before investing.
Let’s take a look at some of these risks in more detail.
Volatility of the stock market
Investing in the stock market involves considerable risk, and this is especially true when trading Robinhood shares. The stock market can be volatile and unpredictable, especially regarding individual stocks like Robinhood shares. Even if you have done your research and chosen a strong company to invest in, you still may incur losses because of sudden changes in the stock market.
Additionally, the recent purchase of 7.6 percent stake by Sam Bankman-Fried has caused further volatility for Robinhood shares due to this activity (which is referred to by analysts as “event-driven trading”). The large purchase made by Sam Bankman-Fried caused an immediate pop of more than 20%, which reflected an increase in investor sentiment and faith in the platform. However, that same sentiment could quickly reverse itself if news impacts the future performance of Robinhood shares.
Therefore, a potential investor should assess their risk tolerance before investing in any company or stock option -including Robinhood shares- as any investment may be subject to sudden price changes due to external events or overall market movements outside one’s control.
Lack of regulatory oversight
A primary risk of buying Robinhood shares is lack of regulatory oversight. As a private company, Robinhood does not have to follow the same stringent rules and regulations that publicly traded companies must adhere to. This can result in a lack of transparency around how shares are valued, leading to inflated prices that may not accurately reflect underlying values. Additionally, there is no guarantee that Robinhood will remain private for long – if it does indeed go public, its current shares would become more expansive and may not be worth as much as they previously were.
Furthermore, investing in stocks like Robinhood offers carries market risk or risk related to economic conditions such as recessions or deflationary environments. It’s important to consider this when considering the purchase of any stock, including those offered by Robinhood. Finally, the price of a given stock could be relatively volatile due to news events or additional investments made – even those related to executive moves like Sam Bankman-Fried’s 7.6% stake – which can cause rapid spikes in share price followed by sharp declines in a relatively short time frame.
Lack of liquidity
When buying Robinhood shares, there are several risks to consider. One is the lack of liquidity, making it difficult for investors to enter and exit trades. This problem is compounded by the limited availability of some securities on Robinhood, as some stocks may only be available in certain countries or regions. Some orders – such as margin, options and stop-loss orders – are not supported on this platform either.
Additionally, because investors don’t need to make a large up-front payment when investing in Robinhood shares, they may be tempted to trade more actively than they normally would with other investment platforms. This can increase investors’ exposure and risk when trading early after a big event like the one outlined above.
In addition to lack of liquidity and order types available through Robinhood, there is also a limit on positions that can be open at any one time (100 single stocks or ETFs). Therefore, all these factors should be considered before buying Robinhood shares.
Potential for insider trading
When buying or selling Robinhood shares, traders should be aware of the potential risks associated with insider trading. This type of trading occurs when company insiders, such as key executives or board members, buy and sell securities within their own company without making the public aware of their trading activities. While not necessarily illegal or immoral, insider trading can lead to investors making uninformed decisions and risking their money on stocks that may not perform well.
For example, suppose a company executive knows a stock is about to grow considerably due to an upcoming news release related to its finances or business plans. In that case, they may buy large amounts of stock before the release to make a profit. This would constitute insider trading and can leave outside investors who don’t have this information at a disadvantage. Additionally, if caught by regulatory authorities, these executives could face fines and other penalties.
Investors must be vigilant when researching Robinhood shares and any other stocks they consider investing in. There is often an element of risk associated with stocks due to potential insider trading activities. However, by thoroughly researching companies and assuming responsibility for their financial decisions, investors increase the chances of investing in successful companies that generate returns on their investments rather than those that lose money due to ill-informed choices.
Concluding, investing in Robinhood shares has the potential to bring in high rewards, however, investors must be mindful and aware of the risks associated with buying these stocks. All investments carry some inherent risk and when buying Robinhood shares, some common risks that could occur include:
- Market volatility.
- Liquidity risk (the ability to easily buy and sell shares on the open market).
- Dividend risk (not all companies pay dividends).
- Legal and regulatory risks.
Additionally, it is recommended to diversify your investments between different asset classes for a more balanced portfolio. Finally, being informed of potential risks and knowing your objectives before purchasing Robinhood shares are essential to successful investing.
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