Meme Stocks: Everything You Need To Know
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A meme stock is one that has become wildly popular among internet users on social media platforms such as Reddit and Twitter, drawing the attention of retail investors. When it comes to meme stocks, we are not talking about a particular type of stock characterized by its inherent values. They are simply stocks that have gained an increase in volume due to the hype around them online.
This means that the meme stock community is the greatest factor in determining the value of a meme stock. Through coordinated efforts, they can influence the price of potential meme stocks, initiate a short squeeze on heavily shorted companies, and keep the prices of those stocks high over an extended period of time.
As one of the most trending investment options available on the stock market, a meme stock can be a great way for you to generate income. It is important to consider the risks and twists involved in trading meme stocks before you embark on that journey.
In this article, we’ve got Ezekiel Chew, a world-renowned forex mentor, to share his take on meme stocks. As you read further, you will understand the basics of meme stocks and get helpful tips on how to trade in them.
How do Meme Stocks work
Unlike other stocks, meme stocks are influenced by their popularity in discussion threads on platforms such as Reddit. They often get overvalued in a short period of time due to their circulation on social media. This spike in price is, however, not a reflection of the quality of the company’s products or services. Meme stocks can be small-cap, large-cap, growth stocks, or value stocks. They can be established names or startups.
The meme community has developed its own glossary of slang that is used about meme stocks. Some of them are diamond hands, meaning to hold on to a stock even when the price drops in the belief that it will rise again; paper hands used to refer to people who sell when they perceive a drop in stock value, and; chicken tenders, meaning profits from selling stocks.
Meme stocks have a cycle that follows the stocks from their initial popularity on spaces such as Reddit forums to the point when investors can reap profits. The cycle involves the following stages:
Early Adopter Phase: Individual investors identify an undervalued stock. They buy it in large amounts, and the stock begins to experience a gradual increase.
Middle Phase: The increase in the stock volume gains the attention of other investors and observers. More people buy it, and the price skyrockets.
FOMO | Late Phase: FOMO is an acronym for “fear of missing out”. As word about the stock begins to spread in online forums and social media, the fear that failure to catch the stock wave will lead to regret grips investors. This leads to a buying frenzy among investors.
Profit-Taking Phase: Early traders start to cash out at this stage. Mass selling of the stock again makes the value start dropping. Investors who buy early and sell late often make the highest losses.
Meme Stock Trading Benefits
Meme stocks have quite a number of benefits. The smart investor who trades strategically can be in for massive returns at the end of the cycle.
Profit for Retail Traders: Meme stocks are especially great for retail traders. They can create huge profits for retail traders. Current market trends indicate that more than 58% of active traders will trade more crypto in the future. The implication of this is that there will be more retail participation in the market, and meme stocks will continue to be a trend even after Covid 19.
Young Investors: Also, meme stocks can prove to be an invaluable part of a young investor’s portfolio. They are more accessible to younger people due to the fact that they gain popularity through the internet and social media platforms. Nonetheless, it is not certain whether meme stocks will improve long-term financial planning among young investors. There is always the likelihood of the meme stock phenomenon becoming boring or losing its excitement. At the moment, though, it is an interesting way to invest for the young investor.
Meme Stock Trading Risks
As interesting as they are, meme stocks can be very unpredictable. Here are some reasons why you should think twice before investing in them:
Lack of Fundamentals: Meme stock price is influenced by its popularity online, with very little consideration of the business performance of the company. The result of this is artificially high prices, which increase the chances of the stock price falling in the long run. It is difficult to predict when this fall might happen, and investors are often left to trade purely based on instincts. They are thus at risk of downward share performance if the fundamentals of the business do not hold up against a dip in the economy or market.
High Volatility: Meme stocks are highly volatile. This puts investors at a greater risk of losing their investments or having underperforming portfolios. Recent studies have indicated that passive, diversified investments are more likely to perform better than active trading in the long run.
Potential Stock Dilution: Stock dilution happens when the number of outstanding shares increases and every shareholder owns shares of lesser value than they previously did. Meme stock companies have been known to take advantage of their higher valuations by issuing new shares. When this happens, the stock becomes “diluted”.
Notable Trend at GameStop
GameStop Corp. (GME) was the first successful meme stock. A viral video posted by YouTube persona, Roaring Kitty in August 2020 predicted that GME stocks could skyrocket. This, Roaring Kitty explained, was due to the fact that the stock had some of the highest short interest in the market, mostly with short positions held by hedge funds. If a massive short squeeze were to occur, these hedge funds would need to cover their positions, which would drive GameStop stock much higher.
This video led to a chain of events that led to a spike in the price of GME stocks, as predicted. By January 2021, the price had increased to a staggering $500 per share from its price of $5 the previous year. Wallstreetbets users on Reddit adopted this trend and began to target heavily shorted stocks to buy in large quantities as meme stock.
Some of these were AMC Entertainment Holdings Inc. (AMC) and Blackberry Limited (BB), Bed Bath & Beyond Inc. (BBBY), Koss Corp. (KOSS), Vinco Ventures (BBIG), Support.com, and even Robinhood Markets Inc. (HOOD). These stocks experienced swift increases in short periods of time. However, not all of them were successful.
A particularly interesting result of the GME saga is the legal scrutinizes it attracted. The Justice Department and the House Financial Services Committee looked into the events surrounding it. There were also lots of ethical concerns about Reddit practices as related to traditional financial investors in the stock market.
Also, brokerages such as Robinhood began to restrict GME and other meme stocks from their trading list. The explanation behind this was that it had become important for the restriction to be made in order for Robinhood markets to meet their brokerage increased regulatory deposit rules.
Perhaps the most important result of the meme stock trend is the rise of retail investors. There has been increased interest in retail investment, evidenced by the increased download of stock trading apps. In January 2021, the Robinhood app recorded over one million downloads.
Tips to Trade in Meme Stocks
The most important thing to do before you start trading in any stock is to carry out in-depth research on it. Meme stocks are highly volatile. Their prices are unpredictable. You should trade only when you are armed with up-to-date information about the market and trends. You could also seek out professionals who can provide investment advice.
As you would know by now, meme stocks are not a representation of the performance of a company. They are influenced by their popularity among social media users. The problem with this is that the prices can easily drop as soon as something more interesting happens and people lose interest in the company. You can stay ahead of this fluctuation by trading at the earliest period of the meme stock curve. This will help you to make as much profit as possible.
It also follows that holding the stock for the shortest possible period helps you to avoid heavy losses. Investors who purchase meme stocks earlier and sell them later usually take the worst of the hit when a drastic fall in price occurs. You can also pre-set a stop-loss order on your investment your meme stock automatically gets sold if it reduces to a certain level.
Finally, always make sure that you invest only what you can afford to lose. The meme stock trend is new and unstable, so you should not depend on it as your major source of income or as the major part of your investment portfolio. If you trade smartly, you can make huge profits.
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Conclusion: Meme Stocks
The lockdown period following the breakout of Covid 19 and the introduction of commission-free trading by many brokerages led to a surge of individual investors. These individual investors would sometimes target downtrodden stocks and buy them in bulk, forcing a short squeeze and shooting up the stock prices. This is what is now known as the meme stock trend.
Meme stocks are exciting and refreshing and are great for retail traders. They are also a good way for young investors to make a profit. They are easily accessible to them on the internet. However, the risk involved in meme stocks is their unpredictability. They can be volatile, and a meme stock will likely experience a steep price fall once the buying frenzy is over.
As long as you are well informed on the trends and stock market, you should have no problem navigating meme stock trading. You can make a profit and have fun while doing it.
Meme Stocks FAQs
What makes a Meme Stock?
A meme stock differs from traditional stocks because they are not based on a company’s performance. They are based on the almost cult-like followership they receive on social media such as Reddit. They can be small-cap stocks or large-cap stocks. They can also be growth stocks or value stocks. Meme stocks can be from any industry and any market sector. They are not defined by the particular kind of products or services offered by the company in question.
Why do they call them Meme Stocks?
Meme stocks earned their name because they are primarily influenced by their popularity on internet sites and online communities. A meme is a running idea in pop culture recycled through the internet because it is funny, sarcastic, or interesting. It can go viral when shared multiple times on social media. Similarly, a meme stock starts to increase in value when people hype it on the internet.
