Chances are high that you heard so much about meme stocks. But what are meme stocks?
A meme stock is any stock that has seen a boost in popularity or exposure due to social media debates, such as Facebook posts. One particular forum, WallStreetBets on Reddit, has been at the core of the meme stock advances.
The WallStreetBets subreddit currently has 10.2 million followers and is growing every day. This platform encourages the general public to follow trends in the stock market, rallying behind a certain stock for an extended period—sometimes indefinitely.
Several Discord chats, Facebook communities, Twitter hashtags, and YouTube content producers are assisting in the rise of these meme stocks in terms of popularity.
The popularity of meme stocks changes, as does the amount of money invested in them. In the same way that there could be highs during periods of high demand, there can also be lows during periods of enormous exoduses. Many meme stocks have gained popularity due to their widespread shorting, which can have an impact on the stock’s performance. There may be more peaks after the current one, but there’s no guarantee.
What is the Value of a Meme Stock?
The popularity of a meme stock develops as it is shared on social media, indicating that it is based on social feelings. Its value has little or nothing to do with the company’s performance.
A social sentiment indicator in the stock market helps investors estimate how well a certain firm is performing in popularity. The indicator utilizes data from social media and businesses to construct the charts. The results, in theory, provide perspective into how security might perform in the future. It is not foolproof like any stock market signal, but it is typical. Even the stock market social media site StockTwits utilizes its mood assessment to provide consumers with information:
The bottom line determines the worth of a privately owned company’s corporate value. The market capitalization of public corporations accounts for a significant portion of their value. Shares are only valued at what consumers are prepared to pay for them when they are purchased.
The emotional component of this is at the heart of it. There’s a fear indicator (the CBOE Volatility Index, or VIX) for alternative investors who want to make their investments based on the results of other investors’ departures.
Meme stocks are difficult to play since the peaks, and falls can be unpredictable. Meme investors are likely to suffer significant losses as the stocks inflate and their value nosedives dramatically. Even so, they do have the potential to generate significantly bigger capital returns than other types of equities.
Pros and Cons of Meme Stocks
Example What Stocks are Meme Stocks
The Complete Guide to What Stocks are Meme Stocks and Why You Should Care
All investments have a certain risk level; some are worse. Meme stocks aren’t any different.
Since meme stocks rely heavily on social prominence instead of the company’s performance, they have their set of pros and cons.
Take into account that these benefits and risks generally affect the retail investor section. Whereas a stock’s effectiveness can change the value of a huge investment firm’s short position, consider these benefits and drawbacks regarding how it would affect you.
Given the potential for a burst in buying activity to send a stock price rising, there are several advantages to possessing meme stocks (and possible meme stocks before their prices shoot up).
- A chance to earn extremely significant profits in a short duration.
- It is a share in a novel investment concept that has been discovered before the broader market.
- The meme stock movement may be around for a long time because a youthful population weaned on social media has years of ripe investing.
- There are risks associated with betting on meme stocks, just as with other extremely unstable investments (like the linked cryptocurrency trend).
- In the same manner that earlier instances of virally inflated stock prices have come and gone, the meme stock craze may not persist indefinitely — particularly if some investors return to work and spend lots of time away from home.
- Supply and demand drive short-term share prices, which means that price movements are erratic and can quickly result in significant losses.
- Several meme stocks do not operate on any fundamentals, and their returns might suddenly reverse direction, leading the business to lose its shine in the eyes of ordinary investors.
How to Invest in Meme Stocks
Meme stocks are highly volatile investments. New and inexperienced traders should shun such serious risks. That’s particularly true if you haven’t devoted time studying how the equity market operates and how to make excellent financial selections.
There are strategies to invest in meme stocks while limiting your risk. For example, fractional shares have rendered it simple to invest extremely tiny amounts in most stocks. Instead of purchasing one share, which might have a price varying from a few pennies to hundreds of dollars, you can invest depending on a dollar amount, buying a portion of a share instead.
When you’re curious to learn how trading works, but you don’t want to risk a lot, you may acquire a portion of an individual stock for as little as $1. It lets you get in on the experience of meme investing without committing too much.
Some ETFs can provide exposure to the meme movement if you are not interested in establishing and managing your collection of meme stocks. One such example is the VanEck Social Sentiment ETF (NYSEMKT: BUZZ), an actively managed portfolio of 75 stocks that consistently rank highly in social media discussions. The portfolio’s top holdings include companies like AMC, Palantir, and GameStop. The ETF has a yearly expense ratio of 0.75% (which means that for every $1,000 invested, it costs $75 a year in expenses). Other meme-related exchange-traded funds (ETFs) are also in the works.
Investors are attracted by the promise of considerably significant gains in a short period. On the other hand, people wanting long-term gains may consider constructing an investment strategy based on many meme stocks with more than a one-time possibility of producing positive returns. Remember: these stocks may be extremely volatile, so plan ahead of time and be ready to continue investing more money as time goes on.
Alternatives to Meme Stocks
If investing in meme stocks does not appeal to you, you can try out other alternatives considering its setbacks.
The term “ETF” refers to exchange-traded funds that work together and share money from various investors to make varied investments in stocks, bonds, and other assets—or sometimes in a combination of multiple assets—in the stock, bond, and other asset markets. You can buy ETFs on stock markets, causing them to be more liquid than mutual funds.
Robo-advisors are not investments in the traditional sense. However, using algorithms to predict investment decisions can make the whole process less difficult for you. You’ll share information about the degree of risk you’re prepared to accept in light of your current situation and objectives. In the following step, the Robo-advisor will construct a portfolio for you using ETFs, thereby removing the obligation to make investment decisions from your shoulders.
If you decide to invest in individual stocks, many options are significantly less volatile than these stocks. Typical blue-chip companies, for example, have a track record of high profitability and fairly stable stock prices. They also generally pay dividends, which provides you with an additional source of income.
Stocks provide significant investment opportunities. However, when deciding whether to put your money in a meme stock, it is best to weigh your options keenly. There’s no need to rush into something because of its hype. Instead, you can find other alternatives or try out the meme stocks using the tactics suggested in this article.