Lawsuits Filed against Robinhood
Lawsuits have been filed against Robinhood for restricting trading on certain stock named Gamestop, AMC, Black Berry, and Nokia to name a few. The lawsuits were filed in New York claimed that Robinhood rigged the market to help the hedge funds.
In an online interview with Elon Musk, Vlad Tenet CEO of Robinhood stated that on Wednesday January 27, 2021 they’re unprecedented downloads and activity. On Thursday morning they received a request from the NSCC that additional funds were needed to cover the volatility.
Robinhood Halts Stock Purchases
Robinhood allowed people to sell their stock while not allowing people to buy certain stocks such as GME, AMC, BBBY and others. Retail investors noticed that certain stocks were being heavily shorted by hedge funds. One stock in particular was Gamestop, it had been shorted over 100%, online investors attempted to purchase more of the stock as the price rapidly increased.
Robinhood halted the purchase of the stock but allowed people to sell or hold Gamestop, AMC and other shares. Robinhood reported that they allowed people to sell because it may have created a hardship if people were unable to access their money.
Investor opinion is that by Robinhood allowing people to sell but not purchase shares of certain stocks helped the hedge funds. https://www.reuters.com/article/us-retail-trading-usa-congress-idUSKBN2AA262
Robinhood allowed its customers to trade out of stocks but did not allow customers to purchase certain stocks such as Gamestop. This forced the share price to decrease resulting in a loss of gains for its stock holders.
This enraged many retail investors that wanted to purchase GameStop.
Risk of short selling
Short selling is a risky business because the price of a stock can grow infinitely upward. If a trader shorts a stock and the stock price goes up the trader loses money because they now have to purchase the stock back at the higher price in order to return the shares to the original buyer. The shares can continue to rise in price forcing short sellers to buy back the stock at the higher price in order to close out their short position.
Robinhood investors that were unable to continue to purchase certain stocks saw the price of the shares decrease. Their loss is limited to the value of the amount they invested.
Please seek financial advice before investing. This article was written for entertainment purposes only.