How do retail investors behave? I wish I knew. It seems that they have an increasing impact on some markets, but where is the focus? A paper titled "The Retail Habitat" seeks to answer this question and finds that retail investors prefer to trade hard-to-value stocks. Stocks with a lot of retail trading have more intangible capital, longer-duration cash flows, and are more likely to be mispriced. So why do retail investors focus on the harder-to-value names? The authors do not fully explore this critical issue. They just identify the stocks that seem to have more retail focus. I would suggets that that retail traders focus on big bets, the lottery tickets. The lottery ticket names, of course, will be stocks that can possibly produce large gains.
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