What are the Pros and Cons of Buying Popular Shares?

Whether investing in popular shares is a good or bad thing can depend on the interpretation of the phrase. Popular shares can refer to either a stock that is heavily traded, or one that is held for a long time by many people. In the former case, the pros of liquidity are weighed against the cons of potentially rapid price changes. In the latter case, the pros of stability are weighed against the high price of the stock.

The usual definition of popular shares is based on volume: the most popular share is the one that is bought and sold the most time during a day. Investors may need to exercise caution when assessing shares on this basis, as this may be affected by the number of shares that exist in a company. It's possible for a large company to have a high volume of trading, but for this to only represent a small proportion of the shares in the company.

The main advantage of investing in a stock that has a high volume of trading is that investors will usually not struggle to find a buyer. This does not guarantee the investor will make money, but it reduces the risk of being unable to cash in at a chosen time if the price rises, or get out of the market by selling if the price falls. Another result of the high volume of trades is that changes in supply and demand for the stock are more likely to result in rapid changes in the stock price. This can be a pro or a con, as the effect is to exaggerate the results of the investor making the right or wrong buying and selling choices.

Usually, popular shares will attract a wider range of investors, and thus are less likely to be chosen by people for any one particular reason or tactic. In turn, popular shares are more likely to perform in a similar fashion to the market as a whole. This can be an advantage if an investor believes the market itself is likely to steadily grow in the long term. It can also be a disadvantage if the investor hopes to outperform the market.

Another, and contradictory, interpretation of a popular share is one that people tend to hold for a long time. This is more common with companies that are seen as relatively large, well-established and stable, with consistent profit levels. These are usually referred to as blue chip companies. The main advantage is that, in theory at least, the financial stability of the company will usually outweigh short-term market movements. The main disadvantage is that such stocks often carry a high price, making it difficult for an investor to buy a large number of stocks, and making it more vulnerable to a large price fall.