The Most Popular Stocks Traded by Retail Investors

Introduction

As individual investors, retail traders have a diverse range of investment preferences and trading styles. However, some categories of stocks tend to dominate in trading volume and interest among retail investors. By understanding retail traders’ latest market trends and behaviours, you can determine opportunities to benefit from heightened volatility and activity amongst the most popular stocks traded.

The most popular types of stocks for retail investors generally fall into a few broad categories:

• Large-cap growth stocks: Major tech companies and other high-growth firms attract interest from retail investors looking for significant price appreciation and capital gains potential. Although risky, growth stocks offer the chance for substantial returns on investment.
• Speculative stocks: Penny stocks, cryptocurrencies, biotech, cannabis, and other volatile stocks with a “lottery effect” appeal to higher-risk retail traders hoping for significant gains. However, the chance of large losses is also greater.
• Exchange-traded funds (ETFs): ETFs provide retail investors with a convenient way to invest in a basket of stocks, bonds, or commodities. Lower fees compared to actively managed funds attract cost-conscious individual investors.
• Options and derivatives: Options, futures, and other derivatives appeal to certain retail investors looking to capitalize on volatility and generate income. However, the risks are higher due to the complexity of these financial instruments.

By understanding the types of stocks that most interest retail traders, you can make strategic investment choices based on your own financial situation, risk tolerance, and priorities. You can also benefit from the momentum and activity around the stocks most appealing to individual investors. However, be wary of “following the herd” into risky speculative plays or reacting to hype and market euphoria. Do your own research and evaluate all investment options carefully.

Large Cap Growth Stocks:

Large-cap growth stocks refer to fast-growing companies, often in innovative industries, that have a sizable market capitalization. Major technology companies like Apple, Amazon, Facebook, Netflix, and Google-parent Alphabet are large-cap growth stocks dominating retail investor interest and trading volume.

For example, Apple (AAPL) is a leader in the large-cap growth category and perpetually one of the most popular retail investor stocks. Apple revolutionized personal technology with the iMac, iPod, iPhone, and iPad. The company has a loyal customer base, an innovative pipeline, and a strong balance sheet with over $200 billion in cash. However, Apple also faces risks from regulation, competitive pressures and economic downturns that threaten discretionary consumer spending.

These big tech names attract retail investors looking for considerable price appreciation and capital gains potential. Given their leadership positions, popular products and services, and room for continued growth, major tech companies frequently offer significant opportunities for long-term investment returns.

However, large-cap growth stocks also come with higher risks for retail investors. Share prices can be highly volatile, and you can potentially lose a large portion of your investment if the company comes under regulatory scrutiny or competition intensifies significantly. It’s easy to buy into the hype and media excitement around these firms only to find share prices tumble after results or guidance fail to match high expectations.

Unlike value stocks that trade at a discount due to slower growth, growth stocks have higher-than-average price-to-earnings ratios and valuations. This indicates investor willingness to pay a premium for anticipated future growth. However, high valuations mean a longer runway is needed for the company to grow into its stock price. Any stumbles, technological obsolescence or new barriers to growth can substantially impact gains or lead to losses.

For these reasons, retail investors should thoroughly research before investing in large-cap growth stocks. Look at the company’s leadership, growth strategy, competitive advantages and other fundamentals to determine whether the lofty expectations and valuations seem reasonable and sustainable. It’s also wise to diversify your portfolio with stocks across industries and sectors to manage risk.

While the chance of strong returns attracts interest, large-cap growth stocks require monitoring and an investing time horizon of at least 3 to 5 years (or longer) to overcome volatility and capitalize on long-term growth. For retail investors, these stocks should be a component of a balanced investment strategy based on your financial goals and risk tolerance. With prudent management, large-cap growth stocks can significantly enhance overall portfolio performance over the long run.

Speculative Stocks

Speculative stocks refer to highly volatile stocks with a “lottery effect” that attract retail investors hoping for significant gains. This category includes penny stocks, cryptocurrencies, biotech, cannabis, and other risky ventures. While the chance of substantial returns appeals to specific traders, the probability of losing a significant portion of your investment is also high due to uncertainty.

For example, Bitcoin and other cryptocurrencies exemplify speculative stocks. Cryptocurrencies are not tied to any physical currency or commodity and are mainly unregulated, highly volatile digital assets. The price of one Bitcoin rose over 1,300% in 2017, only to subsequently fall nearly 80% from its peak. Retail interest surges when crypto prices skyrocket but quickly wanes, leaving many individual investors with substantial losses.

Penny stocks are incredibly low-priced, small company stocks that are also popular with speculative retail traders. However, penny stocks lack liquidity, and a large spread exists between the bid and ask price. Shady brokers frequently use deceptive practices to promote worthless penny stocks to unsuspecting traders. Speculating in penny stocks often ends badly, with the broker and other early buyers walking away with sizable gains from pumping up the share price, leaving retail investors holding essentially worthless shares.

Speculative stocks require extensive risk management due to significant volatility and factors outside a company’s control. For retail investors, limiting speculative stocks to a tiny portion of your portfolio and setting stop-loss orders help minimize risks. Do significant due diligence to avoid outright fraud and pump-and-dump schemes. Never invest money in speculative ventures that you cannot afford to lose.

Whether cryptocurrencies, penny stocks, or other speculative plays, these assets should only be a small part of a retail investor’s balanced and diversified investment strategy. If generating substantial short-term gains were easy, everyone would do it. The odds always favour more prudent investing for long-term financial success. While speculation has its place, retail investors must exercise caution and manage risks to achieve their goals.

Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) have become popular with retail investors seeking low-cost, convenient access to a basket of stocks, bonds, commodities, or other assets. Unlike mutual funds, ETFs trade on exchanges like stocks. Major fund issuers such as Vanguard, iShares, and State Street SPDR offer hundreds of ETFs covering various indexes, sectors, asset classes, and investment strategies.

For example, one of the most popular ETFs is the Vanguard S&P 500 ETF (VOO), which tracks the S&P 500 index of large US companies. It has over $400 billion in assets and an ultra-low expense ratio of just 0.03%, meaning it costs only $3 annually to invest $10,000 in the fund. By owning VOO, retail investors gain broad exposure to the overall US stock market and wide diversification in a single purchase.

However, while ETFs provide convenience and low cost, risks remain based on the underlying holdings and asset types. Volatile ETFs such as a commodity, biotech or emerging market funds can lead to significant losses, the same as with stock picking. Complex, leveraged or inverse ETFs may still be riskier due to greater volatility and longer-term erosion of returns from rebalancing and fees.

For retail investors, the low-cost indexing approach of ETFs like VOO provides market-matching returns over time but minimizes gyrations from stock picking or timing the market. Niche ETFs in high-growth areas can also be a play on future trends when done prudently. However, always manage speculative ETFs as a small portfolio allocation, set stop losses, and follow prudent risk management practices like those for volatile stocks.

Diversification is critical, so choose ETFs across asset classes, industries, market caps, and investment strategies based on your financial situation and risk tolerance. For the best chance of success, hold ETFs for 3 to 5 years or longer to overcome shorter-term volatility. With prudent investing, ETFs provide a simple, low-cost way for retail investors to build wealth over the long run. But as with any investment, do your due diligence to avoid following the latest fads into risky or unsuitable ETFs.

Options and Derivatives

Options, futures, and other derivatives are complex financial instruments that appeal to certain retail investors looking to capitalize on volatility or generate extra income from their stock holdings. However, derivatives also come with significant risks due to higher complexity and leverage.

For example, stock options provide the right, but not the obligation, to buy or sell shares at a set price within a limited time. Investors buy call options if they expect the share price to rise or put options if they expect a price decline. Options can lead to significant percentage gains (or losses) due to leverage, where a small down payment, called a premium, controls a futures/options contract with a notional value much higher than the premium amount.

While the chance of substantial returns attracts interest, the odds of losing your entire investment are high if the stock price moves in the opposite direction of your play. During market crashes, derivatives can exacerbate volatility due to deleveraging. To limit risks, options trading requires extensive education to understand strategies like spreads, straddles, and collars.

Even with knowledge, derivatives are complex, risky bets on short-term price movements and are best left to experienced professional traders. For retail investors, the risks of options trading generally outweigh the rewards. However, selling covered calls, which involves selling options on stocks you already own, is less risky and a popular income-generating strategy. You earn money upfront by selling call options on your shares. If the stock price rises enough for option buyers to exercise the calls, you make a profit by selling your shares at the agreed call price. However, you should take advantage of any price increase above that level.

While futures, swaps and other derivatives appeal to speculating retail investors, the risks are similarly high. Avoiding derivatives altogether is wise for most individual investors unless you have extensive trading experience and understanding. If speculating with options, limit it to a small portfolio allocation, follow all prudent risk management practices, and never invest more than you can afford to lose.

For retail investors, focusing on long-term investing success through stocks, ETFs, cash, and bonds is well-advised compared to complex derivatives. Although generating income or profiting from volatility can be attractive, the odds are stacked against inexperienced traders. If something seems too good to be true, it likely is. Prudent investors build wealth over time through patience, knowledge, and avoiding greed or fear-based decision-making.

Conclusion

In summary, while retail investors have a range of investment preferences, specific categories of stocks dominate interest based on the potential for significant gains. However, volatility and risks are higher in these “risk-on” market areas. By understanding the types of stocks that most appeal to retail traders, you can benefit from heightened activity around select opportunities. But you must also exercise caution.

Large-cap growth stocks offer substantial return potential due to continued expansion, but valuations and expectations make them prone to price gyrations. Speculative stocks like penny stocks, cryptocurrency, and biotech can lead to massive losses and frequent fraud. Although ETFs provide low-cost, convenient access to diversified baskets of stocks or assets, leveraged and niche ETFs increase volatility and complexity. And options and derivatives, while appealing to income or speculative interests, feature significant risks due to leverage that requires extensive experience to manage.

For retail investors seeking long-term success, a prudent approach to these high-risk stock types is essential:

• Limit to a small portfolio allocation based on your risk tolerance. Never invest more than you can afford to lose.
• Conduct thorough due diligence on any company, fund or play before investing. Look beyond hype and headlines.
• Set stop-losses for speculative positions in case the tide turns quickly. Don’t go down with the ship.
• Diversify across stocks, sectors, and asset classes. Don’t put all your eggs in one basket.
• Hold for a long time horizon, 3-5 years minimum. Don’t buy into short-term frenzies.
• Learn continuously to understand market forces and your personal psychology/biases. Make dispassionate rather than emotional decisions.

By balancing opportunities with prudent risk management, you can sometimes benefit from the interest in select growth stocks, sectors or other market “momentum” areas. But always maintain a focus on long-term success over short-term thrills. With patience, discipline, and continuous learning, retail investors can achieve their financial goals through a strategic, balanced approach to volatility and higher-risk stocks. Keep speculation minimal and look beyond the latest fads or headlines when building your investment strategy and overall financial well-being.