Meme stocks: What are They and Why You Should Be Careful Buying Them
This type of emotional buying can cause investors to make decisions they’ll regret. Stocks in general have been getting attention across young investors. According to Empower Personal DashboardTM data, U.S. stocks account for around 40% of younger Americans’ assets as of July.
Meme stocks prove that markets are no longer ruled by numbers alone, they’re ruled by narratives. Hedge funds holding large short positions had to buy at any price, triggering a runaway rally. Good research can help investors find the best companies to invest in.
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For example, one of the most prominent meme stock promoters is known by his social media handle Roaring Kitty. He is largely attributed as being an originator of the meme stock trend from posts on Reddit and other social media platforms covering companies like GameStop (), AMC (), and some others. His Reddit posts in particular for GameStop, which is widely considered the first meme stock, began attracting a small following of investors in the summer of 2020. A short seller may ultimately run out of available funds to hold onto the short and will be forced to buy back the shares at a higher price and close out the position. It adds additional upward pressure on the stock’s price as they’re all forced to buy the stock and cover at ever higher prices when many shorts are forced to cover at once.
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The sudden resurgence of meme stocks in May 2024 nonetheless served as a reminder of the unpredictable nature of markets and the power of social media to drive investor behavior. These platforms create a snowball effect, where online communities create excitement and drive up stock prices based on momentum rather than financial performance. Investing in meme stocks may feel like a way to get something out of social media, but before you proceed any further, make sure you know the risks.
- Stick to making investment decisions that are right for your specific situation.
- The brokerage has funds that track large-cap stocks, which the website says, “are considered to be stocks of the largest 500 U.S. companies.”
- New waves of online traders occasionally revive interest in struggling companies, proving that this isn’t a one-time event but a recurring stock market buzz trend.
- Not everything about meme stocks is negative, there’s a reason investors are drawn to them.
- A meme stock’s trading volume may rapidly decrease, leaving you stuck holding the proverbial investment bag.
Meme stocks: What are they and why you should be careful buying them
Unlike meme stocks, which are often driven by hype and speculation, traditional investments are based on data-driven analysis and valuation. Many meme stocks are heavily shorted by hedge funds, meaning investors are betting on their price decline. This can lead to a short squeeze that drives the stock price even higher. It was the gaming retailer GameStop (GME) that drew the most attention. The investment research and financial services firm Morningstar reported that meme stock investing was especially popular with younger investors who shunned traditional investing strategies.
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GameStop and other such meme stocks are publicly traded equities whose stock price is heavily influenced by social media. “Both prices and trading volumes of meme stocks may be exceptionally volatile, as the hype on platforms like Reddit can cause spikes in demand,” Britannica Money also wrote. Unlike with traditional stocks you may invest in, the price performance of a meme stock is generally not based on the company’s underlying fundamentals.
Some companies, like the movie theater chain AMC, embraced their meme stock status by leaning into it across social media platforms (see figure 1). They work best as small, short-term trades, not as part of a core investment strategy. Tesla isn’t a classic meme stock, since its value is supported by real performance.
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One example is the VanEck Social Sentiment ETF (BUZZ +2.69%), an actively managed portfolio of 75 stocks that rank high in social media conversations. Top holdings in the portfolio include Robinhood Markets, Microstrategy (MSTR +3.24%), and Palantir. This ETF has an annual expense ratio of 0.75% (meaning it costs $7.50 per year for every $1,000 invested). Because a surge in buying activity can send a stock price soaring, there are some benefits to owning meme stocks (and potential meme stocks before they rocket higher). Meme stock crazes, which in the past have been driven largely by investors on social media platforms and in online forums like Reddit, cause certain stocks to go viral. Perhaps the most famous in recent history was the WallStreetBets Reddit thread that encouraged people to buy GameStop and AMC Entertainment stock at the beginning of 2021.
Meme Stocks Explained: Examples, Advantages, and Risks
One of the features of meme stocks, especially early on, has been that they tend to be heavily shorted names. There’s a lot of short interest in the stock or a large proportion of the company’s outstanding shares have been sold short. Investors in this space focus on strong financials, earnings, and growth potential. This approach is less influenced by social media hype and more by data-driven analysis. Meme stocks are often heavily shorted by hedge funds, who bet on their price decline.
- Traditional investors often have a long-term perspective, focusing on steady growth over years.
- Meme stocks are often heavily shorted by hedge funds, who bet on their price decline.
- Both companies also allow investors to buy fractional shares of stocks, so you can buy a piece of the action without getting in too deep.
- This dynamic shows how crowd-driven market behavior can quickly turn speculation into sharp price movements.
- While it can be tempting to get in on a meme stock craze, your money is safer invested in other ways like through index funds.
- Buying meme stocks isn’t investing; it’s trading, and it closely resembles sports betting and other types of gambling from multiple angles.
As with other fast-moving businesses, SoFi’s biggest hurdle now is how quickly it can focus on breakeven. Perhaps more importantly, it’s critical for you to have good reasons to invest in anything. Stick to making investment decisions that are right for your specific situation. Following the herd or any other impetus that is not grounded in a strong fundamental basis for investing your money is never prudent. Meme stocks often have heavier discourse and analysis in discussion threads on websites like Reddit and posts on platforms such as X (formerly Twitter) and Facebook.
The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. A market analyst and member of the Research Team for the Arab region at XS.com, with diplomas in business management and market economics. Since 2006, she has specialized in technical, fundamental, and economic analysis of financial markets.
GME is squeezed again
People in their 20s hold a median of nearly $115,000 in U.S. stocks, while those in their 30s have just over $198,000, and people in their 40s top $321,000. What Is Cryptocurrency Monitoring forums and sentiment trackers helps spot early momentum.However, treat them as context, not confirmation. The louder the stock market buzz trend, the closer the cycle may be to peaking. This disconnect is what causes stock prices to deviate from fundamentals, a core risk every trader must understand.