Fintech applications have increased the accessibility, affordability, and ease of stock trading in the world. Consider the $8.43 billion smartphone brokerage Robinhood, which has over 13M users since its launch. Robinhood’s success is due to the fact that it has made trading and investing more enjoyable, in addition to having no sign-up fees and no commissions on stock transactions.
The current rise and collapse of Hertz as well as the sudden spike in its price share after declaring bankruptcy illustrates the dangers of trading stocks. New investors should be aware of the dangers associated with day trading companies like Hertz.
How to buy Hertz Stock on Robinhood:
The layout of Robinhood is skillfully created such that beginning traders find it difficult to set the app down. Some claim to check the Robinhood app up to ten times daily, which is more frequent than their social network accounts. The scoreboard on Robintrack.net, which lists stocks from most prominent to least prominent, incentivizes competitiveness among traders utilizing the platform.
Anonymized information about the stock holdings of Robinhood’s users, including the number of people who own a certain stock, is made available to the public. The information is published and is tracked over time on third-party websites like Robintrack.net.
Approximately 43,000 Robinhood accounts held shares in Hertz before the company filed for bankruptcy; this number increased in the 1st week of June to 73,000 and reached a maximum of almost 171,000 by the middle of the month, as per the RobinTrack.
Professional investors’ reactions as the price of Hertz shares rose over the final week of May and the first few days of June were a combination of disdain and awe.
Some believed that the rise was caused by “irrational exuberance” on the part of buyers who were unaware that the shares may and presumably would go to zero quickly, leaving them with a complete loss. Financial media suggested that new traders on websites like Robinhood were responsible for the spike.
The idea that Robinhood investors were in charge of supporting the S&P 500 in last weeks was refuted by certain experts. But while profiting from the stock market’s recent upswing, according to a Barclays research, Robinhood investors were really losing money.
A corporation must travel a long path before declaring bankruptcy. Before its mistakes force it into bankruptcy, a company that seeks Chapter 11 protection can be badly managed or not have long since responded to market conditions.
There is a lengthy history of poor financial management at Hertz. Since 2014, the firm has had a succession of CEOs, and it is weighed down by a mountain of debt that, at the time of its bankruptcy filing, reached $17 billion. Incredibly, 90% of its total capital was in debt, as opposed to the 45% to 50% of industry average.
Therefore, the coronavirus epidemic was the ultimate straw for Hertz. Consider Avis Budget Group Inc., one of the company’s main rivals, whose shares traded quite similarly to Hertz’s from the beginning of the worldwide coronavirus outbreak until April, when the difference between them started to increase.
Hertz has a much more debt than Avis, which had a lot more cash on hand going into the COVID-19 emergency.
It could be tempting, if you’re new to self-directed investing, to jump on the bandwagon of bankrupt stocks and ride a rally. But it’s a very dangerous and frequently futile endeavour. Why? When a firm files for Chapter 11 bankruptcy, there is a significant danger that common equity investors would lose everything.
Investing in businesses that have filed for Chapter 11 bankruptcy is “highly dangerous,” according to the Securities and Exchange Commission (SEC), and is “certain to result in financial loss.” During the reorganisation process, creditors and bondholders often become the new owners of a company’s shares; in almost all situations, this entails cancelling existing equity shares so that secured and unsecured creditors can be compensated in the form of new stock.
Additionally, dividend payments to stockholders and interest and principal payments to bondholders cease during bankruptcy. If a business emerges from bankruptcy, investors may be given access to its post-bankruptcy shares, which, according to the SEC, may be less numerous and worth less than the initial shares.
In the worst case, the bankruptcy court can rule that the company in bankruptcy is insolvent, meaning its liabilities exceed its assets, and that the investors won’t receive anything following the reorganisation.
At the height of the Great Recession in 2009, General Motors filed for Chapter 11 bankruptcy protection. Prior to the restructuring, common stockholders who had GM stock had their holdings cancelled in March 2011 and were not awarded any post-bankruptcy shares.
Hertz has stopped selling $500 million worth of shares in order to get through its current problems after the SEC raised concerns about the transaction and initiated an investigation. On June 15, just before cancelling the agreement, Hertz sent an investor alert.
The prospectus states that there is a “substantial risk” that holders of our common stock, including those who bought shares in this offering, won’t receive any compensation under the Chapter 11 Cases and that the stock will be worthless.
Hertz further stated that it has not yet reached an arrangement with its creditors and that if it does not, the business will be forced to file for bankruptcy Chapter 7, which will make its common shares worthless even more quickly.
There are more important causes to approach trading cautiously. University of Nebraska student Alex Kearns, 20, committed suicide in the middle of June when the Robinhood interface revealed a significant options trading debt on his account. The company’s founders have promised to tighten the requirements for trading options and improve the user experience in response to the catastrophe. Although this tragedy has nothing to do with the Hertz scandal, it does serve to underscore the risks that novice traders confront when they encounter trading losses.