Follow recent economic news lately, and you’re likely to come across meme stocks. These are shares that are made popular by online forums. Is it nothing more than a silly trend, or will you find a hidden gem behind the internet noise?
We’ll start by sharing more details about meme stocks, especially the hype surrounding them. Then, we’ll talk more about their potential benefits and risks. More importantly, we’ll explain how you should plan to invest in meme stocks.
People around the world can share information in a blink of an eye. Unfortunately, you will have to know how to separate sound advice from all the noise. Understanding meme stocks can help you identify good and bad investments on the internet.
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What are meme stocks?
You’ll often find jokes passed around on social media. Perhaps it’s a funny-looking Shiba Inu with a silly joke as a caption. These are called memes.
They’re pieces of culture or information that are passed around on the internet. Nowadays, they bring assets into the mix. You’ll often hear the news refer to them as meme stocks.
These are shares that are frequently discussed in online forums. The groups agree on buying plenty to send shares “to the moon.” In other words, they buy to raise the stock prices.
Why do they do this? The most well-known examples were driven by the desire to beat Wall Street investors. The online folks thought the traders were profiting off the struggling companies.
Many of them do it by short selling. When a company is in trouble, its stock prices fall. That’s where short-sellers come. They borrow shares in the hopes that the share price goes down.
As it drops, they earn more money. However, short-sellers lose money if the stock price goes up. Online forums get back at them by purchasing a lot of that company’s stock.
As they buy and hold more, the stock price increases. This backs short-sellers into a short squeeze. They’re left with two painful choices:
- Fund their position – A short sell position may only stay up to a certain liquidation price. Once the price hits this threshold, the position will close, and the trader will lose money. They could prevent liquidation by putting more money in there.
- Close their position – The trader may simply stop the short sell order. This usually means the price has gone far too high for the position. Sadly, traders often do this when they’ve already lost money from the short sell.
This was the idea behind Gamestop and AMC stock. However, not all meme stocks have the same goal. Some are just scams. Others use them as pranks.
Do meme stocks provide any benefits?
You might be wondering who would ever deal with meme stocks. Contrary to popular belief, they offer certain benefits. Here are some of them:
- More people start investing – Back then, only a few could invest in stocks. Nowadays, everyone can become a retail investor. It’s all thanks to investment apps making it easier. What’s more, social media made it easier to share investment advice, including meme stocks.
- Training for young investors – People in their 20s can use these as a gateway to other assets. They could gather information about potential investments. What’s more, it lets them feel the highs and lows of stock market investing.
What are the risks of meme stock investing?
All investments involve risks. Meme stocks are no exception. If you’re not careful, you may lose money just because you followed advice from the internet. Learn more about the risks below:
- Nothing but hype – As the name suggests, these assets are often driven by memes. That’s why stock rating agencies are often against them. Once their popularity simmers, so will the demand for the meme stock.
- Volatility – The prices frequently rise and fall. People invest in response to a popular trend. In turn, the stock moves according to the hype. Unfortunately, the trend may shift dramatically and rapidly without warning.
- Stock dilution – Companies may take advantage of their meme stock status. Some may issue more stocks in response to their higher valuation. As a result, meme stock prices go down, and their investors lose money.
How should I invest in stocks?
We’re not saying you shouldn’t invest in meme stocks, though. You’re in charge of your portfolio, not us. But what might be the proper method of investing? Here are the steps:
- Set goals – Have a clear reason for investing in the first place. It will change the assets you will need. Let’s say you want long-term returns. You may choose great dividend stocks while avoiding risky investment moves like short selling.
- Learn your assets – This goes for all the investment options, not just stocks. Study how they work, especially the factors that affect their prices. Learn important terms, too, such as year-to-date, trading volume, and market cap. This will help you understand assets even more.
- Choose the right platform – You can choose multiple online stock trading platforms nowadays. Choose the one that has the benefits you need. TD Ameritrade is one of the more well-known options.
- Take profit, stop loss – This applies if you’re planning on short selling. Place a stop-loss order to make sure you don’t lose too much money. Meanwhile, a take-profit order ensures you earn money when a stock hits a certain price. Otherwise, the price may drop back down, and you miss out on potential earnings.
- Diversify – This is the oldest rule of thumb when investing. Diversification means you should invest in different assets instead of just one. For example, you may add an S&P 500 index fund along with stocks. This could minimize risk and maximize profit.
This article is not intended as financial advice. Again, plan your investments with your research. Do not use the money you are not willing to lose. There is no such thing as easy money.
Retail traders need all the information they can get. You can learn more about investments by reading the other articles on Inquirer USA. Or course, you should read other sources too.
Meme stocks could be the beginning of your investment journey. Still, it shouldn’t end there. Broaden your horizons by checking the other assets out there.
Learn more about meme stocks
What are the popular meme stocks?
Some of the popular examples were AMC Entertainment and GME stocks. At the time of writing, Virgin Galactic Holdings are expected to be the next top meme stock. Remember that these are based on internet hype. They can quickly change based on the whims of online forums.
Should I invest in meme stocks?
It’s up to you whether or not you’ll invest in any kind of asset. Just note that you should expect the potential risks involved. After all, meme stock prices go up because of fickle online trends. If that goes away, there’s not much else that could keep the price afloat.
What is the best meme stock to buy?
This article is not meant as investment advice. We won’t tell you which meme stock you should buy. Instead, you should plan and study investments by yourself based on your budget and other factors. What’s more, we will remind you only to use the funds that you are willing to lose.