Retail Traders' Top Picks on Robinhood: A Snapshot

The rise of retail trading, fueled by online platforms and zero-commission fees, has led to a significant shift in the investment landscape. Robinhood, a popular commission-free trading platform, offers a unique window into the minds of retail traders. Let's explore the most popular sectors and individual stocks among retail traders on Robinhood and how their preferences have evolved over time.



According to Robinhood's data, large-cap stocks dominate the platform's top 100 holdings, accounting for 55% of the selection. Mid-cap stocks make up 9%, while small-cap stocks represent 36%. The most prominent stocks among retail traders include AAPL, TSLA, and AMZN. However, the popularity of these stocks and sectors has changed over time. In 2020, retail trades accounted for 19.5% of all US stock market trades, up from 14.9% the previous year, and approximately double the amount observed in 2010. This surge in retail trading can be attributed to the rise of online trading platforms, the appeal of zero commission fees, and the increased participation of retail traders during the COVID-19 pandemic and stay-at-home mandates.

Retail traders' investment decisions on Robinhood differ from those of institutional investors in several ways. Retail traders tend to hold under-diversified portfolios, engage in excessive trading, and are influenced by attention-grabbing news, extreme past returns, and abnormal trading volume. This behavior can lead to underperformance compared to the market, as some studies suggest. However, other research indicates that retail traders may also engage in trading based on private information, potentially leading to better performance.

Social media posts and news articles play a significant role in influencing retail traders' investment decisions on Robinhood. A study analyzing the net buying activity before and after a (social) media publication found that both publication types lead to an increase in holders, but the effect is short-lived. Notably, social media posts have a significantly higher impact on retail trading compared to news articles. Investors on Robinhood tend to buy stocks that are recommended on Reddit, regardless of text sentiment, but act as contrarians by selling stocks with positive news coverage and vice versa.

The influence of social media and news articles on retail traders' investment decisions can have significant implications for overall market dynamics. The "meme stock" phenomenon, driven by social media platforms like Reddit, has led to unprecedented volatility and short squeezes in stocks like GameStop (GME) and AMC Entertainment (AMC). This behavior can lead to market inefficiencies, as retail traders may not always make rational decisions based on fundamentals, but rather on emotional responses to news and social media sentiment.

Moreover, the influence of social media and news articles on retail traders can contribute to excessive co-movement in returns and liquidity, limiting investors' ability to fully benefit from diversification and affecting the cost of capital. This phenomenon can be attributed to factors beyond co-movement in fundamentals, such as sentiment-based theories like the "category" and "habitat" theories.

In conclusion, retail traders on Robinhood have a distinct investment style compared to institutional investors, with a focus on large-cap stocks and a strong influence from social media and news articles. Their investment decisions can have significant implications for overall market dynamics, contributing to market inefficiencies and excessive co-movement in returns and liquidity. As retail trading continues to grow, understanding the behavior and preferences of retail traders will be crucial for investors and market participants alike.