The COVID-nineteen pandemic triggered a bizarre number of new trends, ranging from toilet newspaper hoarding to the rising of what’due south become known as “meme stocks.” If you’re a newer investor, you may be curious near what meme stocks are and whether they’re worth investing in. We’ll intermission down the meme stock craze for yous and clue you in on what you need to know when it comes to choosing whether to invest in or avoid them.
Meme stocks refer to a blazon of stock that all of a sudden surges in value due to social media hype. Unlike traditional stocks, meme stocks don’t rise in price based on fundamentals, like sales or earnings. In fact, sometimes they’re actually shares of companies that are doing pretty poorly based on traditional standards.
Similar to stocks targeted by twenty-four hours traders, traders in meme stocks rely on volatility alone. As more than and more investors make it on the hype, they all purchase into the stock at the same fourth dimension, collectively inflating its price. This tin can result in a substantial rise in a stock’s value within a short menses of time.
The downside is that meme stocks tend to fall as quickly as they surge, making them very unpredictable and risky.
How are Meme Stocks Created?
Social media platforms such equally Reddit, YouTube, and Telegram are the lands where meme stocks are hyped up. Usually, a grouping or user with a large following selects a stock to target and and then spreads the news across the online world, urging everyone to buy into the stock at the same time. Many of the most pop meme stocks (such as AMC and Gamestop) are targeted specifically because they take abnormally high levels of short interest.
Short interest is generated when investors “short sell” shares of a item stock that they believe will go down in value. These shorted shares are usually borrowed from the investor’s broker, with the plan being to buy them back at a lower cost once their value drops and proceed the profit.
When meme stock investors target such a stock, they create what’s known equally a “short clasp.” Basically, this means that they drive the price upwards instead of down, forcing brusk sellers to panic and buy back their stocks, often at a higher price than intended. This generates more buying, which only raises the value of the stock even more.
Are Meme Stocks a Worthy Investment?
Kickoff of all, never ask a stranger online this question. They’ll almost always reply with a resounding “yeah!” whether information technology’s in your best interest or not. This is considering meme stocks rely on a massive amount of people to buy into the stock at once in order to enhance its value. The truth, withal, is that meme stocks are merely worth investing in for very short amounts of fourth dimension and just if you understand exactly what they are and how to trade them.
Much like day or swing trading, profiting from meme stocks greatly relies on your power to read charts and pinpoint the correct times to both buy and sell. It besides requires being in bear on enough with social media to guess when the stock will rise in value only allowed from the massive amounts of peer pressure you’ll encounter to “buy and agree.”
Some other important component is existence able to tell whether a stock really a adept company that’s simply attracted involvement among meme stock investors or whether it’s driven purely by meme stock hype. If it falls into the second category, then understand that information technology’south far from a sound long-term investment and should be approached with a very unlike strategy.
While some people do make coin from buying and selling in the short run, almost everyone who holds a pure meme stock past a certain point is going to lose their gains when the stock’southward popularity fades and its price begins to correct.
Peak Meme Stocks Right Now
Due to their very nature, meme stocks are constantly falling in and out of favor. In order to find the meme stocks of the moment, information technology’southward not a bad idea to follow WallStreetBets on social media to see which stocks are getting the most mentions. Meme stocks as well tend to exist pretty easy to spot, as they’re often in the “movers” or “nigh active” sections of many brokerage sites due to their loftier volume.
Some of the most popular meme stocks of the moment or recent past include:
- ContextLogic (WISH)
- AMC Entertainment (AMC)
- GameStop (GME)
- Blackberry (BB)
- Nokia (NOK)
Advantages of Meme Stocks
Amongst the biggest advantages of meme stocks are that they tin exist quite profitable if you fully understand what they are and how to play them. Due to the massive amount of volume they generate, they tend to exist a day trader’s dream and can make you lot a lot of coin in a brusk amount of time if you know how to identify when to buy in and when to cash out for a turn a profit.
Additionally, meme stocks also involve a great bargain of hype, then information technology tends to be pretty easy to figure out which ones are “trending” at the moment. Another, less fortunate reward for experienced traders is that meme stocks tend to attract a large number of inexperienced traders who don’t fully empathize what’due south going on.
Many less-experienced traders will “hold” long after a meme stock’south short interest has dissipated, due to naught more than the advice of others on social media. Sometimes the simply thing more than profitable than an actual brusk squeeze is millions of people who believe at that place’s one coming, even if the facts say otherwise.
Disadvantages of Meme Stocks
While meme stocks can be great for experienced traders, they tin exist disastrous for kickoff traders who don’t understand what they’re getting into or why.
The average meme stock generates a huge amount of peer pressure to “buy and hold.” Usually, this advice is generated past more experienced investors looking to pull a pump and dump scheme. It then trickles down to the less experienced masses, who parrot the advice to others and shame anyone who doesn’t follow it.
If you do get into meme stock trading, have whatever advice yous hear on social media with a grain of salt and trade solely based on chart patterns and indicators.
Key Identifiers of Meme Stocks
Meme stocks tend to share several cardinal characteristics which should help you pinpoint them. Some of the about common include:
- A large amount of hype on social media platforms such as Reddit, TikTok, YouTube, Discord, and Telegram
- Large short interest. For this reason, some meme stocks are pretty terrible companies that would never have risen in value if not for the coordinated ownership endeavour
- A huge corporeality of volume
- Large price swings in both directions
- A big amount of hazard
- Online promises of an impending short squeeze and the wealth it will generate (often by inexperienced investors who don’t really empathise how a short squeeze works)
- Large amounts of peer pressure to “buy and concur”