Meme stocks have caused a lot of commotion in the market recently, but these investments come with enormous risk. Over the past few years, meme stocks have garnered considerable attention in the news and online forums. This emerging fascination with certain stocks has lured many newcomers to the market in the hopes of picking up quick profits during a time when economic outlooks remain dubious at best.
For some, the expectation of a short squeeze is a primary draw, potentially earning hopeful investors 5, 10, or 15x returns in a matter of days or even hours. For others, meme stocks are merely speculative investments that individuals should avoid at all costs.
No matter where you stand, the stories behind the rise of stocks like GME or AMC are fascinating reminders of the unusual times we’re living in today. Read on to learn more about what meme stocks are and whether or not they are viable in supporting smart wealth management.
The Rise of Meme Stocks
A meme stock is a type of equity that gains popularity by generating interest through social media and the sharing of memes. Meme stocks like Gamestop first rose to prominence in a Reddit thread called WallStreetBets. Members of this online community noticed that investment firms held a significant short position in Gamestop. Many suggested that a surge in share buying would force a short squeeze, causing the stock price to rise.
Within a short period, retail investors began buying up shares of Gamestop at a dizzying pace. In August of 2020, Gamestop shares were trading in the $4 range, but by January of 2021, share prices skyrocketed to a staggering $347.51. While share prices have fallen significantly since the initial squeeze, many retail investors late to the party remain hopeful there will be a repeat of this unusual event. The Gamestop phenomenon quickly spread to other meme stocks like AMC, KOSS, BBY, and BB — all heavily shorted stocks with relatively dismal analyst projections.
The Dangers of Meme Stocks
Shortly after Gamestop reached its peak in January, sellers flooded in to claim their profits and share prices plummeted to a low of around $40. Many inexperienced investors who expected prices would continue to rise quickly became bag holders. Although this volatility presented a unique profit opportunity for a lucky few, more seasoned investors sounded the alarm about the hazards of trading meme stocks like GME.
Similar situations have played out over the past year with stocks like AMC and even cryptocurrencies like Dogecoin. One common denominator among these investments is the lack of realistic stock valuation. While most stock prices move according to technical indicators, profits, or growth, meme stocks are merely speculative and offer little or no evidence to support their momentum. In many ways, investing in meme stocks is not far removed from gambling.
Although meme stocks may seem like an attractive opportunity, it’s essential to resist the FOMO (fear of missing out) that all too often attracts unsuspecting investors. Acquiring wealth takes work, patience, and an ability to set emotions aside that can easily overwhelm otherwise healthy investment decisions. Instead of purchasing meme stocks, consider more stable wealth management strategies to meet your financial goals.