For the better part of 18 months, investors have been taken on a wild ride. They've navigated their way through the fastest decline of at least 30% in the history of the benchmark S&P 500 (it took about a month) and have relished in the most robust bounce-back rally of all-time. The widely followed index has more than doubled since hitting its pandemic bottom in March 2020.

Whereas some folks have shied away from these wild swings, heightened volatility is precisely what's drawn other people (ahem, retail investors) to invest in the stock market.

A person holding a smartphone that's displaying a stock chart with a buy and sell button above the chart.

Image source: Getty Images.

Online investing app Robinhood (HOOD 2.54%), which recently became a publicly traded company, has been a particularly popular platform for retail investors to get involved in the stock market. Since the end of 2019, Robinhood has added approximately 8 million new users, an 80% increase. 

Why Robinhood? For one, it's a commission-free platform for stock trades executed on major U.S. exchanges. For someone trying to put $100 or $500 to work in the market, it's no fun seeing commission fees eat up 2% to 10% of your cash. With Robinhood, that's not a concern.

Robinhood also gifts free shares of stock to new members, and it allows fractional-share investing for certain securities. That means you don't have to save up more than $1,900 to just buy a single share of Chipotle Mexican Grill. Instead, Robinhood's platform will allow you to put a much smaller amount to work, and you'll own a fraction of a full share.

Although it's fantastic to see young investors beginning their trek to financial freedom early, it's equally worrisome to see the stocks they're buying. In many instances, Robinhood's retail investors are chasing penny stocks, momentum plays, or otherwise money-losing or poorly performing companies.

If you don't believe me, take a closer look at Robinhood's leaderboard for September, which features the 50 most-held stocks on the platform:

Company Company
1. Apple  26. GameStop (GME -3.52%)
2. Tesla Motors  27. Bank of America
3. AMC Entertainment (AMC -1.76%) 28. OrganiGram Holdings 
4. Sundial Growers (SNDL -1.19%) 29. BlackBerry
5. Ford Motor Company 30. Coinbase Global 
6. Nio 31. Facebook 
7. Amazon  32. Tilray
8. Walt Disney  33. Nvidia 
9. Microsoft 34. Starbucks
10. American Airlines Group (AAL -0.38%) 35. Virgin Galactic
11. Plug Power  36. Advanced Micro Devices 
12. Robinhood Markets 37. Moderna (MRNA -0.15%)
13. Carnival  38. Canopy Growth
14. Pfizer  39. Vanguard S&P 500 ETF 
15. Nokia  40. SPDR S&P 500 ETF 
16. Aurora Cannabis  41. AT&T 
17. GoPro  42. Twitter 
18. Zomedica (ZOM -1.40%) 43. Coca-Cola 
19. Lucid Group  44. FuelCell Energy
20. Naked Brand Group  45. Norwegian Cruise Line
21. Delta Air Lines 46. Ideanomics 
22. Netflix  47. Workhorse Group 
23. Palantir Technologies 48. General Motors
24. Alibaba  49. General Electric
25. Snap  50. Zynga 

Data source: Robinhood, as of Aug. 28, 2021. 

Meme stocks remain in focus

Easily the most identifiable trend from Robinhood investors is their love of meme stocks -- i.e., companies lauded for the social media buzz they create, rather than their operating performance or fundamental metrics. Examples include theater chain AMC Entertainment, GameStop, BlackBerry, and even Robinhood, which has rocketed up its own leaderboard.

Arguably, the most interesting development among meme stocks on Robinhood has been the precipitous fall down the leaderboard for GameStop in recent months. Although it's still the 26th most-held company, it was once a fixture in the top 10. With GameStop proving less volatile than other meme stocks, and the company selling shares of common stock to raise capital on two separate occasions, it would appear that some momentum-loving retail investors are moving on to potentially greener pastures.

What isn't a surprise is seeing AMC maintain its position at No. 3 on the leaderboard -- a spot it hasn't relinquished in six months. Retail investors continue to bet on another short squeeze. As of mid-August, 92.4 million shares of the company were held short, representing about 18% of its float (i.e., tradable shares).

However, these same investors are completely ignoring a laundry list of red flags with AMC and the movie industry. For example, AMC has burned through almost $577 million in cash through the first six months of 2021. It has $5.5 billion in corporate borrowings and another $420 million in deferred rent, and it can't sell any more stock without approval from retail investors. Using simple math, this money-losing company can't make good on its combined debt and lease obligations. To boot, movie ticket sales have been on a nearly two-decade downslope. This is what I mean when I say some Robinhood investors are chasing low-quality companies.

A penny stood on its side atop a newspaper clipping of a rapidly rising chart.

Image source: Getty Images.

Penny for your thoughts

Robinhood's retail investors also have a fascination with penny stocks -- i.e., companies with share prices below $5. Examples include Canadian marijuana stock Sundial Growers, Zomedica, Naked Brand Group, and OrganiGram.

More often than not, penny stocks are stuck at a low share price because of operating or management issues. In other words, penny stocks are penny stocks for a reason. While retail investors might believe that buying penny stocks gives them a higher probability of doubling their money, this usually isn't the case.

For instance, Sundial Growers has planted itself at No. 4 on the leaderboard for about six months. Even though cannabis is a rapidly growing industry, and Sundial was sitting on roughly $950 million in cash, marketable securities, and long-term investments, as of Aug. 9, the company is a mess. Management's desire to raise cash at all costs has seen the company's share count balloon from 509 million to 2 billion in nine months. This level of dilution is burying longtime shareholders and all but assures the company will have no shot of generating meaningful earnings per share.

The icing on the cake is that while Canada's legal weed sales rise, Sundial's revenue is declining. In sum, there's a really good reason this stock is stuck below $1 a share.

And it's not just Sundial. Veterinary diagnostics and drug company Zomedica has diluted the daylights out of its investors and has little in the way of real-world results to show for it. Despite launching its first diagnostic product, Truforma, in March, the company has generated only $29,817 in sales. That's not millions, by the way. That's $29,817. While some of its shortcomings can be blamed on the sale of its distribution partner, it doesn't excuse the company's poor results.

Furthermore, Zomedica had almost 980 million shares outstanding, as of Aug. 11. While it's raised plenty of cash, it's also made it virtually impossible to generate meaningful earnings per share. In most cases, penny stocks like Zomedica and Sundial should be avoided at all costs.

A physician administering a vaccine into the right upper arm of a young woman.

Image source: Getty Images.

Pandemic rebound plays are popular

You'll also notice that Robinhood's retail following has invested aggressively in direct and indirect COVID-19 rebound plays.

For instance, biotech stock Moderna has been rocketing up Robinhood's leaderboard over the past couple of months. Moderna's COVID-19 vaccine, mRNA-1243, generated a robust 94% vaccine efficacy in a large-scale November-published study, and it's been one of the two most-popular vaccines since emergency-use authorization was granted in a number of key developed markets. This year alone, product sales of Moderna's lone drug are likely to top $19 billion. Though there remain serious questions about the longevity of this blockbuster vaccine in the wake of increasing competition and virus mutations, Moderna has been one of the hottest stocks on Wall Street since 2020 began.

Retail investors are angling for the travel bounce-back trade, too. American Airlines has pretty consistently been a top-12 most-held stock for a year. The bet seems to be that increased vaccination rates will spur travel and send airline stocks markedly higher. But similar to piling into AMC and Sundial, Robinhood's investors have chosen to back what's arguably the worst company of the bunch in American Airlines.

Admittedly, I'm not a fan of airline stocks. It's a high-capital-input industry that requires the economy to fire on all cylinders to produce mediocre margins. When anything more than a hiccup arises with the economy, airlines struggle mightily. In American's case, the company is weighed down by billions in debt added during the pandemic. It also won't be paying a dividend or repurchasing its common stock as part of its agreement for taking a COVID-19 relief loan. There's simply no reason to own shares of American Airlines.