Meme stocks: What are They and Why You Should Be Careful Buying Them

BlackBerry’s stock more than tripled, while AMC increased by nearly tenfold. But neither saw the same viral growth of GameStop, whose share price increased by hundreds of dollars in a matter of days. A meme stock is a stock that has seen an increase in volume not because of how well the company performs, but rather because of hype on social media and online forums like Reddit. For this reason, these stocks often become overvalued, seeing drastic price increases in just a short amount of time. In general, many of the meme stocks that saw sky-high stock prices in 2021 have come down quite a bit in 2022, sometimes to below where they started. Others, notably GameStop, remain elevated, although still far lower than the all-time highs.

So while it might be a positive thing that these meme stocks have increased interest in the stock market, in the end, experts recommend following a much more prudent investing strategy. Typically, the meme stock cycle begins when a retail investor blogs favorably about the company’s prospects while downplaying the reasons the stock has declined. The blogger’s post, typically on Reddit or other social media venues such as Twitter or Instagram, causes the shares to rise.

  1. Meme stocks have been a boon to investors, day traders, and brokerage platforms but companies have also capitalized on the meme stock phenomenon.
  2. The meme stock era began in July 2020, as U.S. stocks were rebounding from the pandemic bear market earlier that year.
  3. The two are similar because you need either existing or new investors to continually come in and purchase the stock at ever higher prices.

As a result, the meme stock concept adopted a David vs. Goliath or Robin Hood connotation of taking from the rich Wall Street elite and rewarding the small retail investor. You see, AMC recently said that they reward what are market movers retail investors with free popcorn and exclusive screenings. The CEO, Adam Aaron, has praised retail investors on numerous occasions. This is why right now, AMC is still the poster child of these meme stocks.

Pros of meme stocks

As more and more shares are sold short in this way, there are fewer shares left available to borrow. Once a stock becomes hard to borrow, even the most motivated short seller may be unable to do so. Unlike online pump-and-dump schemes aimed at defrauding unwitting investors, the promotion of meme stocks largely involves buying and holding with the above-mentioned strong hands even after the price spikes. The term meme stock is informal, but it is now used even among professional traders and analysts to refer to stocks whose popularity is largely based on internet trends.

Fisker has ‘arguably become a meme stock,’ says Stocktwits

Meme stocks, however, didn’t truly emerge until the year 2020 via the Reddit forum r/wallstreetbets. Unlike its predecessors and other investing message boards, WallStreetBets became known for its unconventional and often irreverent tone. In this and other forums that have popped up since, users work together to identify target stocks and then promote them, while also putting their own money to work.

A lot of stocks have recently been lumped together into the “meme stock category” as short squeezes have become a popular way for younger investors to try and make some fast money. You see, Gill posted his progress, and users of the forum WallStreetBets started buying shares of GameStop. This rapidly escalated into a massive short squeeze that led several hedge funds to lose hundreds of millions of dollars. Does that mean experienced investors should avoid meme stocks entirely? There are even ways to invest in meme stocks while mitigating your risk.

Stocks are sold short on margin (because they involve borrowed shares). As the price of the shorted stock rises, the short seller will begin to experience losses. These losses must be covered in a timely fashion, often prompted via margin calls, whereby the broker demands funds to make up for those paper losses. One of the features of meme stocks, especially early on, has been that they tend to be heavily shorted names.

The WallStreetBets subreddit has 10.2 million readers and counting. This platform fuels the masses to follow trends in rallying behind a stock—sometimes to no apparent end. “If you were to select a person who held a position in GameStop at random at the frenzy’s peak, it is not obvious that that person made money over the course of the GameStop episode. Lots of people kept holding the stock on principle far longer than they should have,” Alex Chinco, professor of finance at Baruch College, told Al Jazeera.

Your Annual Percentage Yield is variable and may change at the discretion of the Partner Banks or Public Investing. Apex Clearing and Public Investing receive administrative fees for operating this program, which reduce the amount of interest paid on swept cash. Additionally, some people may focus on entertainment trading, which is akin to gambling. Most notably, GameStop (GME) took the world by storm despite obstacles that accompany brick-and-mortar storefronts in the digital age. GME shares grew 1,914.55 percent in the first few weeks of the year.

Ask more questions than ‘What’s the next big meme stock?’

You might have heard about the Reddit short squeeze of GameStop that happened earlier this year. Experian websites have been designed to support modern, up-to-date internet browsers. If you are currently using a non-supported browser your experience may not be optimal, you may experience rendering issues, and you may be exposed to potential security risks.

Part of the motivation behind the online support for certain meme stocks comes from hedge funds’ short positions in those companies. There is no doubt that it can be exciting to make money on day trading and to be a part of something bigger, such as in the case of the GameStop surge. And yet, studies have shown that even the most experienced of day traders lose money.

Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund. Mega-cap stocks usually offer a proven track record, stability, and potential dividend payouts, investing in them can help protect investors against downturns in the market. Meme stocks are actual stocks listed on exchanges and available for trade.

The third criteria to find the next meme stock is the management, possibly the CEO must be pro retail traders. Burry noted that GameStop was trading at a massive discount and revealed that his hedge fund, Sayan, held a position in the video game retailer. Now, this was back in 2019 before all of this craziness happened. Commission-free trading refers to $0 commissions charged on trades of US listed registered securities placed during the US Markets Regular Trading Hours in self-directed brokerage accounts offered by Public Investing. Keep in mind that other fees such as regulatory fees, Premium subscription fees, commissions on trades during extended trading hours, wire transfer fees, and paper statement fees may apply to your brokerage account. There is no guarantee that any of these stocks, or other meme stocks to come, will generate returns.

Experts generally suggest keeping individual stock picking limited to 5% to 10% of your overall investment portfolio. Once your account is open and funded, you can also choose from a number of different index funds, like an S&P 500 fund, a fund that tracks government bonds or a fund that tracks international stocks. Funds that track the S&P 500 are generally an effective way to earn a good return on your money over time. Historically, the average annual return for the S&P 500 hovers around 10%. Risking money in speculative investments can be exhilarating, but it is rarely the path to long-term wealth. Investing in low-cost index funds and through tax-advantaged retirement accounts such as IRAs has a higher likelihood of success than relying on risky investing strategies.

This means taking a closer look at a company’s fundamentals, which are a way to measure its overall financial health. You can do that by comparing things like the price-to-earnings (P/E) ratio and earnings per share. You can also look at how much debt the company is carrying relative to its assets and cash flow.

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