Meme stocks have been a phenomenon greatly experienced during the recent pandemic. Many retail traders and select institutions have benefited off the price movements on meme stocks. In the most literal sense, meme stocks are stocks guided by social media influence which builds up craze that leads to wild price movements. Normally, a stock moves 30-50% a year in gains. Cognitively, meme stocks exceed 100% growth rates within a day, two or three. The growth horizon of meme stocks remains unseen.
Unfortunately, meme stocks can wipe off an investment in a day. This presents huge risk for people who are not shrewd with market timings and end up buying high or selling low. Professional traders point the wild price moves in meme stocks to quirks and retail traders guided by FOMO. Some of the characteristics that define meme stocks include:
Disregards profits, revenue and fundamentals
Meme stocks have no real base or reason that aligns with a company’s real value. It has become incredibly difficult to trade some stocks without the need to incorporate meme stocks in market analysis. This is why meme stocks easily move with disregard of profits, revenue and fundamentals.
Popular among millennials and retail investors
Young investors mostly millennials identify with meme stocks and are pertinent to the abnormal market moves. Reddit harbors a platform called r/wallstreetbets that allows traders to freely exchange information on stocks.
The movements in meme stocks leave most retail investors with the fear of missing out. This easily leads to panic buying or selling and gravitates towards poor decision making.
Meme stocks are highly overpriced
Wild movements in a short period of time
Based on a company’s potential rather than its financial features
Hype guides market direction
Notable examples with the above characteristics are Game Stop and AMC Entertainment. The two stocks saw a rise in value after reddit retailers decided to bet against hedge funds that were heavily shorting (selling) them. Hedge funds ended up losing billions of dollars in the short (sell) trades they held against a building and mounting bullish momentum backed by a massive number of retail traders.
An important question a person should ask himself or herself is whether he or she is ready to risk his or her investment on a meme stock. It is more advisable to wait on the other forms of stocks that offer real growth and value. This way risks are minimized and capital is preserved.
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