For those still itching to trade the next viral stock, invest only with money you can afford to lose. There’s a good chance you have seen the term “meme stock” splashed across headlines before — even if you aren’t actively following business news. 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.
Why do the share prices of meme stocks sometimes experience a sudden rise?
However, in mid-May of that year, the stock experienced a sudden resurgence, fueled by the return of Keith Gill, aka “Roaring Kitty,” to social media. To borrow a quote from a famous Supreme Court justice, it’s something you’ll know when you see it. Meme stocks aren’t a specific sector or stock type, but a loosely-tied group of securities paraded about by social media influencers, retail investors, and pot-stirring CEOs.
Potential rewards of investing Meme stocks
Meme stocks are actual stocks listed on exchanges and available for trade. However, critics argue that their price performance and appeal have little to do with their fundamentals and much to do turnkey forex review should you use this broker with their entertainment value as speculative playthings, much like casino games. Then, in January 2021, the short squeeze that The Roaring Kitty had suggested earlier took place in earnest, with the price of GME shares exploding to nearly $500 amid a frenzy of short-covering and panic buying.
Are Meme Stocks Real Investments?
Historically popular meme stocks include GameStop (GME), AMC Entertainment (AMC), Bed Bath & Beyond (BBBY), BlackBerry (BB), and Nokia (NOK), all of which have experienced significant social media-driven price movements. Figure 1 above shows the closing prices of GameStop shares throughout January 2021. Why did GameStop’s stock price change so much over such a short time period? While a complete answer to this question is very complex and outside the scope of this discussion, the article will summarize common reasons why the price of a stock changes and how a meme stock seems to differ. By driving up the price and “squeezing” these short sellers, Gill and his cohort created massive losses for the skeptics, which included large hedge funds and institutional traders. If you were an active trader during the early months of 2021, you could watch the meme stock rally unfold in real time.
Meme stocks primarily work through collective social media hype, which drives some retail investors to purchase shares en masse. However, this hype-based rally is often disconnected from a company’s financial outlook, making meme stocks risky, especially for those who may not have experience navigating volatile investments. The connection between short selling and meme stocks is worthwhile understanding. In many cases, meme stocks are targets for “short squeezes” because they have high short interest (where many investors are taking positions against them). When the price rises suddenly, many short sellers must buy back shares to avoid further losses, adding more upward pressure.
- Meme stocks also see communities built around them that promote the hype and elaborate on the original meme, inventing specific terms and symbols to accompany the stock.
- By checking in regularly, you can review your investment strategy and decide whether to hold, sell or buy more shares.
- For example, in that same 2021 SEC report, one of the prominent mobile trading apps reported that the average age of their customer was 31 and the median account balance was $240.
- Meme stocks have gotten a lot of attention in recent years, especially since the pandemic.
Only a small number of these have been approved for trading so far, but do include some meme stocks like Tesla and NVIDIA. Ultimately, a short seller may run out of available funds to hold on to the short and will be forced to buy back the shares at a higher price and close out the position. If many shorts are forced to cover at once, it adds additional upward pressure on the stock’s price as they are all forced to buy the stock and cover at ever higher prices. This is known as a short squeeze, and it accelerates a stock’s price increases as more and more short sellers are forced to bail out to cut their losses. One of the features of meme stocks, especially early on, has been that they tend to be heavily shorted names.
Investors may be looking ahead to potential rate cuts by the Federal Reserve, but those are far from a guarantee. As you might expect, the GameStop saga attracted quite a bit of legal scrutiny. The House Financial Services Committee and the Justice Department both took a deeper look at events that led to this surge. Major brokerages, such as Robinhood, that average investors used to engage in this trading frenzy, chose to restrict trading in GME and some other meme stocks. Robinhood’s CEO said the restrictions were to help the brokerage meet increased regulatory deposit mandates.
Our team has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on… ✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit. I am the UK editor for Forbes Advisor with I am the editorial director, international, for Forbes Advisor.
When large amounts of retail investors band together, the upswings can be dramatic. Its also a symbol of market democratization, something that everyday investors have been working toward for decades. We recommend exploring the potential rewards of investing in meme stocks below. If you’re thinking about buying and selling meme stocks, keep in mind that you will probably have to pay taxes on your profits. Capital gains tax rates are especially high on stocks you held for less than a year. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor.
Take every bit of due diligence with a grain of salt and form your own opinions about meme stocks. There is no guarantee that any of these 5 free investing courses available online stocks, or other meme stocks to come, will generate returns. It’s fun to dream about finding an easy shortcut on the path to economic prosperity.
The trend emerged as lockdown measures kept would-be investors at home, commission-free trading apps such as Robinhood entered the scene and US citizens were deciding how to spend their Covid-19 government stimulus cheques. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from common stocks and uncommon profits a qualified professional. Because of this cycle, it’s the early adopters who really profit from these trending stocks. Once the meme stock cycle enters into the FOMO phase, it’s most likely too late to make a profit. Bond Accounts are not recommendations of individual bonds or default allocations.