The Dark Side of Easy Investing: How Retail Investors Are Increasingly Putting It All on One Stock

Strategic Insights -

Online brokerages have made trading easy and affordable, but this ease comes with a risk. Retail investors are increasingly betting big on individual stocks, often with devastating consequences. Take Nvidia Corp., whose market value plummeted by over $400 billion in a single week, a loss equivalent to the combined market value of four of Canada's largest banks. While Nvidia itself is thriving, its shareholders took a significant hit, highlighting the dangers of concentration and behavioral biases in investing.

Key Takeaways:

  • Retail investors are increasingly focused on individual stocks, with some platforms ranking Nvidia as the most popular stock among users.
  • Trading platforms have gamified the investing experience, making it easier for new investors to take risks.
  • Single-stock ETFs are a growing trend, with some funds employing leverage to amplify the daily moves of individual stocks.
  • Many retail investors are failing to diversify their portfolios, instead holding concentrated positions in a single stock.
  • Behavioral biases, such as overconfidence and loss aversion, can lead to poor investment decisions.
  • Companies can quickly falter, as seen in the cases of BlackBerry Ltd. and Nortel.
  • Investors with big positions in a single stock may have trouble stepping out of the way of a train wreck, especially when the stock is down significantly.
  • Nvidia's market value plummeted by over $400 billion in a single week.
  • The loss is equivalent to the combined market value of four of Canada's largest banks.
  • Nvidia's stock has still more than doubled in price this year, despite the recent 14% slide.
  • Single-stock ETFs are a growing trend, with some funds employing leverage to amplify the daily moves of individual stocks.
  • 95% of BlackBerry Ltd.'s market capitalization dropped from its peak between 2009 and 2016.
  • Market dominance can vanish quickly for companies, as seen in the case of BlackBerry and Nortel.
  • Retail investors often fail to rebalance their portfolios, leading to concentration in a single stock.
  • A generation of younger investors emerged from the COVID-19 pandemic with stock picks on the brain, but often lack diversification in their portfolios.

Sources:

  • Lisa Kramer, finance professor at the University of Toronto, in an interview
  • CIBC Investor's Edge, which ranked Nvidia as the No. 1 most purchased stock on their platform in July
  • Harvest ETFs, which launched a suite of single-stock ETFs in Canada in August
  • Dan Hallett, head of research at HighView Financial Group, in an interview