These stocks are prone to large price movements, which are frequently fueled by social media buzz. A meme is a type of social media post that combines an image and a catchphrase to swiftly communicate a concept, style, trend, or behavior.
The term meme stock is new, and there isn’t a single meaning or regulatory categorization for it. Instead, a meme stock label has become part of the Internet’s lingo.
What are Meme Stocks?
Meme stocks are equities that have experienced significant price gains in the stock market as a result of social media debates on Reddit and Twitter. Short-term buyers and sellers typically drive trading in these equities. And, because such stocks rarely have strong business fundamentals to support large price gains, they are prone to wild price swings.
The emergence of meme stocks or meme stock phenomenon is spurred in part by FOMO, or fear of missing out, which is typically stoked by traders’ social media profiles boasting about how much money they’ve made on such trades.
Many meme stocks have significant rallies, which are spurred by a phenomenon known as a short squeeze. A short squeeze occurs when traders rush to buy a stock they believe is expensive and will collapse in price. They make these bets by selling shares of stock they don’t own in order to purchase it at a lower price.
Shorts can lose a lot of money when a stock starts to rise, and investors are obliged to buy at higher and higher prices to get out of their trades. This can cause a company to surge well beyond what investors consider to be a fair value based on underlying fundamentals.
However, if the stock’s upward momentum wears off and it begins to fall, the stock price can drop as those who bought on the way up hurry to dump the now pricey shares.
Why are stocks called memes?
Meme stocks are stocks that go viral as online memes, regardless of how well the company performs in the market. These stocks grab internet audiences and keep them engaged with updates in order to urge them to invest. Furthermore, these stocks elicit excitement among investors, which can lead to panic purchasing even when the market is underperforming.
How to trade Meme Stocks?
If you’re thinking about buying a meme stock or two, evaluate what’s driving the stock’s popularity. After that, think about how the stock fits into your broader investment strategy. For example, if you favor tech stocks or financials, consider whether it makes sense to invest in a company that offers vegan diet items simply because it is now hot on social media. This can assist you in understanding meme stocks and where they could or might not fit into your portfolio.
Consider speaking with a financial counselor about the benefits and drawbacks of meme stocks, as well as whether you should invest in them or stay away from them. Finding a financial advisor, if you don’t already have one, doesn’t have to be difficult.
Check Fundamentals Before Following the Crowd
Meme stocks can be appealing merely because they have the potential to make money if they go viral. However, they aren’t always a good investment for a portfolio, especially for those who prefer more cautious investments.
If you’re considering investing in meme stocks, it’s a good idea to look under the hood first. This entails examining a company’s fundamentals, which serve as a gauge of its liquidity position. Considering things like the (P/E) ratio and earnings per share can help you do that. You can also examine the company’s debt load in relation to its assets and cash flow.
If you’re a day trader, you can also use technical indicators to help you make decisions. Based on overall market conditions, technical indicators can help you determine how a stock is trending right now and where it might be headed next. To track trends, you’ll use technical indicators such as moving averages or Bollinger bands.
Choose the Right Brokerage for Meme Stock Trading
If you’re dead bent on trading meme stocks, look for a brokerage that doesn’t charge commissions. Although some online brokerages still charge fees, more are switching to a no-fee approach for stock and ETF trading. If you’re a price-conscious trader, going with a no-fee alternative can make sense.
Also, be aware of any limits that a brokerage may impose on meme stocks. For example, at the height of the GameStop trading, the online trading software Robinhood restricted the quantity of shares that users could trade. While such restrictions were subsequently lifted, you should avoid a situation where your brokerage restricts your trading options.
How Does Meme Stock Work?
The popularity of meme stock is largely due to online hype. It has nothing to do with the basics, performance, or prospects of the firm, such as profitability or leadership. Its purpose is to entice and engage a big audience with memes about different companies’ stocks.
The value of a community’s shares increases in direct proportion to how successfully it interacts with and reacts to Internet memes. When a stock piques the interest of online audiences and reaches a certain level of attention, it automatically grows in value, transforming it into a meme stock. As a result, it attracts investors who rush to purchase them out of fear of missing out.
A traditional stock’s price can rise by 30% to 50% in a year, whereas meme stocks can rise by the same amount in the same amount of time. Furthermore, these generate excitement in the investment community, resulting in panic purchasing even when the market is not performing well. This temporary price boost, however, quickly reverses, making meme stocks much more volatile and eventually collapsing.
Investors can examine a stock’s volatility and learn about its relationship with US stock indices and other well-known meme stocks. Because these stocks are high-risk, several ETFs are available for those who don’t want to invest in a single stock.
Popular meme stocks List
Here are some of the best potential meme stocks:
- GameStop Corp.
- AMC Entertainment Holdings Inc.
- Bed Bath & Beyond Inc.
- Blackberry Ltd.
- Koss Corp.
- National Beverage Corp.
- Robinhood Markets Inc.
- Virgin Galactic
The Rules of Trading Are Changing
The rules of trade are shifting, as evidenced by investing in or trading meme stocks.
Traders typically target companies that have a reasonable market value and a favorable technical situation. Retail investors flocked to the market as a result of the meme stock craze, fast becoming a force to be reckoned with. Hedge funds that were shorting the stocks had to close their short positions since old-school investors didn’t expect regular traders to trade the stocks up, resulting in significant losses for hedge funds who were shorting the equities.
The fundamentals of meme stocks like GameStop and AMC were not traded higher. Instead, market participants were buying on the strength of the trend. This set off a chain reaction, with better traders identifying this as a one-time opportunity to profit.
Meme Stocks Examples
Here are a few instances of meme stocks that demonstrate how the concept works:
AMC Entertainment
In just a few days in January 2021, the movie theatre corporation AMC saw its stock price soar nearly tenfold. The incidence was timed to coincide with a rise in GameStop’s stock price. After five months, there was flash selling of the particular stock, in which interested purchasers purchased shares, causing prices to rise by more than 500 percent in a week of trading.
GameStop stock
The game merchandise firm GameStop was one among the incidents of meme stocks 2021. It is also the first meme stock. In just a few weeks, the slow-moving venture’s equities increased in value almost ninefold, doubling in value before surpassing the $480 level.
In just a few trading sessions, retail investors banded together and liquidated a hedge fund’s major short bets. The stock’s value and volume soared due to the people who were interested in it, not because of company fundamentals or goodwill.
Drawbacks of Meme Stocks
Investing in meme stocks can be a rollercoaster of emotions. For younger investors of the meme stock community with higher risk tolerance and a longer time horizon to recoup from losses, this may not be a concern. Investing in meme stocks, however, maybe a portfolio mismatch for a middle-aged investor or someone who is five years away from retirement.
The major issue with meme stocks is that predicting which ones will take off and how long the ride will last may be tricky.
Because of their high volatility, meme stocks are risky investments. The price changes in response to online forum conversations and the level of interest in the stocks. As a result, investors must pursue a careful approach to investing. The following are the dangers connected with meme stocks:
- Because the price of meme stocks is not determined by the company’s fundamentals or performance, the best time to sell is unknown.
- On social media, meme stocks are becoming increasingly popular. If investors’ focus shifts from one meme stock to another, the former’s valuation will certainly fall. Investors may lose a considerable amount of money if they sell costly securities at cheaper prices in this situation.
- This price increase is short-lived, making meme stocks even more volatile and eventually collapsing.
- Price swings caused by unforeseen supply and demand might result in large losses.
Bottom Line
Investing in meme stocks may pay off in the short term, but there are some hazards to be aware of. They undoubtedly bring some excitement to your investment portfolio, and they tend to sharply focus the mind of a certain sort of investor. However, there is a risk that their price changes are influenced more by investor speculation than by fundamentals.
It remains to be seen whether meme stock will become a permanent component of markets. To put it another way, buyer beware.
You can invest in meme stocks through top brokerage firms like PrimeFin. The brokerage firm offers commission-free trading.
