Robinhood is changing the way people invest, largely by targeting younger and beginning investors and making it really easy to trade stocks.
One way the online trading platform has done that is to offer fractional shares. And investors are taking advantage of the opportunity in droves. In fact, while the brokerage won't disclose the number of customers trading fractional shares, it did admit that millions had joined a waiting list for this trading method before the feature was rolled out.
Not all stocks are equally popular with Robinhood traders, though. In fact, a company spokesperson identified five stocks most commonly traded by those purchasing fractional shares -- and you'll probably already recognize them as household names.
Image source: Getty Images.
Here are the five stocks most popular among Robinhood investors purchasing fractional shares
So, what are the five most common stocks Robinhood traders are buying fractional shares of? They are:
- Tesla (NASDAQ: TSLA)
- Amazon (NASDAQ: AMZN)
- Apple (NASDAQ: AAPL)
- Microsoft (NASDAQ: MSFT)
- Netflix (NASDAQ: NFLX)
Right off the bat, you'll notice something about all of the stocks on this list: They're all big-name companies everyone has heard of. And because of that, it makes sense that a lot of people are trading fractional shares of them, for two big reasons.
For one thing, most big-name companies like these tend to have expensive stocks. Tesla shares, for example, are trading at over $2,000 each at the time of this writing. Amazon's over $3,000. Many younger and beginning investors -- the type of investors Robinhood caters to -- may not have thousands of dollars to buy a single share of such an "expensive" stock. But thanks to fractional shares, that doesn't matter.
With fractional shares, you can simply specify the amount of money you want to invest in Tesla, Amazon, Apple, Microsoft, Netflix, or any other stock, and buy partial shares if your cash doesn't stretch far enough to buy full ones. The fact that fractional shares open up the door to these stocks for investors without a ton of cash is great, because it means people can invest in companies they believe will do well and aren't limited by their pocketbooks.
The problem comes, however, if inexperienced investors on Robinhood (or anywhere else) are buying these stocks for the wrong reasons -- namely, because they are big-name companies with expensive share prices. Investors often confuse a high share price with a stock being worth a lot, or they assume that if a company has brand recognition, it's a good buy. And that's not always the case.
In fact, there's an argument to be made that some of the companies on this list are overvalued, with Robinhood investors' avid interest in the electric vehicle market potentially pushing EV stocks into bubble territory. And with inexperienced investors often driven to tech companies because of the "coolness" factor, those scooping up fractional shares of all of the companies on this list could also find their holdings too concentrated in one sector, exposing them to outsized risk.
Of course, some of the Robinhood investors buying fractional shares of these five stocks may be doing so for the right reasons -- because they've considered their investment carefully, they believe in each company's business model and leadership team, and they think there's strong potential for growth. However, many others lured in by the brokerage's intuitive trading platform and the low cost of entry that fractional shares make possible may be making a major investment mistake.
Should you buy fractional shares of the five top Robinhood stocks?
If you've done your research and want to buy shares of Tesla, Amazon, Apple, Microsoft, Netflix, or any other big-name brand with a high share price, it's great that fractional shares can make that possible, and it's nice that the Robinhood app makes it easy to buy them even if you don't have a lot of money or trading experience.
But before you jump on the bandwagon with other Robinhood investors, make sure you're making a purchase that's part of a sound investment strategy. After all, even through you don't need thousands to buy any of these stocks thanks to fractional shares, you don't want to make the wrong choices with the money you have available to invest.
10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Walmart wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Stock Advisor returns as of 2/1/20
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Christy Bieber has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, Microsoft, Netflix, and Tesla and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
