A Big Lesson From Robinhood’s Stock

Amanda Heckman|August 7, 2021

Robinhood’s done it again.

It’s causing chaos… dominating headlines… and proving our point.

The action this week shows exactly why we keep shouting about just how different the markets are today. Understand it… and you can come out ahead. Fail to keep up… and you’re in trouble.

Enter the Crowds

Last week we wrote about how individual investors failed to show up for Robinhood’s (HOOD) first day of trading.

The stock never made it past its IPO price of $38 per share. Demand fell short.

Well… look who decided to jump in.

On Tuesday, Robinhood’s trading volume surged. The stock shot up 25% and closed the day at $46.80.

And Wednesday… hoo boy.

The stock spiked by as much as 80% in the early hours of trading. That prompted the market to halt trading of Robinhood shares several times in order to rein in volatility. The stock closed the day at $70.39… an 85% gain from its IPO price.

But it didn’t take long for eager buyers to get burned. Shares slid on Thursday thanks to – surprise, surprise – massive selling by early investors who suddenly had the chance to take their big gains and run. That left individual investors who got in on Wednesday holding the bag… and the losses.

Here’s how these frisky retail investors caused trouble for themselves…

Groupthink

In a bit of irony, the trading platform for the masses that helped create the monsters known as “meme stocks” became a meme stock itself.

On Wednesday, HOOD was the top-trending ticker in the troublemaking Reddit forum WallStreetBets.

So it should come as no surprise that it was also the most-traded stock on Fidelity’s platform.

The action came on the heels of some big money piling in…

Seems the crowd got on board after hearing that Cathie Wood – the famed leader of Ark Invest – picked up 90,000 shares for her Ark Fintech Innovation ETF. And that’s on top of the 4.9 million shares she grabbed through the fund last week. She uses this $4 billion ETF (and its 0.75% management fee) to make bullish bets on high-growth tech companies.

So here’s the lesson. If one person – who ultimately makes her living from fees, not profits from her picks – says the stock is good for her… then is it good for everyone else?

Robinhood is just proving the point we’ve made time and again… that the markets have a new way of doing things.

The company has spurred a new generation of individual investors who are not making informed decisions. They’re making moves based on the “wisdom” of the crowd. These investors are causing volatility to spike in ways we haven’t seen before.

While that can lead to an exhilarating ride up… it can also lead to devastating losses.

So invest with a wary eye… use trailing stops to protect your gains… and ignore the noise of Reddit, err, the crowd.