07 Apr What is a meme stock? Name, popularity, investment safety unpacked

Investing in meme stocks could pay off, at least in the short term, though there are some risks to keep in mind. They certainly add some excitement to your investment portfolio and, for a certain type of investor, tend to sharply focus the mind. But the risk is that their price movements tend to be driven more investor speculation than fundamentals. Whether the https://www.topforexnews.org/investing/7-best-stocks-to-own-right-now-in-2021/ meme stock will become a permanent fixture of the markets remains to be seen. The common thread among them, however, is that social media tends to fuel interest in them. That’s what happened with GameStop as everyday investors banded together to push the stock’s price “to the moon,” partly in defiance of hedge fund investors who had bet against the company.

1. GameStop’s stock price then surged due to a massive short squeeze affecting some major hedge funds that were short the stock and forced to sell to cut losses.
2. This social sentiment is usually due to activity online, particularly on social media platforms.
3. Despite the actions of Robinhood and other brokerage firms, new downloads of those apps skyrocketed after the events surrounding the GameStop stock.

While those limits were eventually eased, you may want to avoid a situation where your brokerage could cap your ability to trade. Aided by AMC’s high level of short interest, retail investors drove up its price to $63.97 by May 2021. AMC took advantage of its meme stock status and created a series of secondary offerings which raised more than $1.5 billion in Q1 of 2021. When an investor takes a long position by buying shares of a stock, their loss is limited to the total cost of the shares. By contrast, when an investor takes a short position, there is no inherent limit as to how high that stock’s price can rise, making the investor’s potential loss theoretically unlimited. GameStop (GME) became a heavily shorted stock due to a decline in foot traffic at malls and dwindling revenues.

What Investors Need to Know About Meme Stocks

There’s a good chance you have seen the term “meme stock” splashed across headlines in the past year — even if you aren’t actively following business news. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as https://www.day-trading.info/the-top-8-most-tradable-currencies/ self-help tools and for informational purposes only. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues.

GameStop: The First Meme Stock

Perhaps the most famous was the WallStreetBets Reddit thread that encouraged people to buy GameStop and AMC Entertainment stock at the beginning of 2021. When online investors understood the short positions against GameStop, people took it on as a Robin Hood-like adventure (often using the trading app Robinhood to do so). As a result, hordes of investors started buying GameStop stock, making it very expensive for the hedge funds to buy back from their short positions. Retail investors are also likely to remain keen to pick up on the latest meme stock. Dominated by younger investors, meme stocks are still seen as a way to generate outsized returns in a short period, especially in the face of rising housing costs and inflation in general.

best-performing meme stocks

Other meme stocks emerged after GameStop, some with varying degrees of success. Hedge funds are types of investments that pool money together from wealthy investors, and short selling is when you borrow shares from a broker and immediately sell them with the hope that the stock price will fall. If it does, you can repurchase the shares at the lower price, return them to the brokerage and keep the difference as profit. 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.

While an ETF such as MEME may be less risky than holding one singular stock, it’s still made up of high-risk investments that could just as easily plummet as skyrocket. GameStop followed suit in 2021, raising nearly $1.7 billion via a secondary offering of 8.5 million additional shares at an average price of more than $200 per share. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ hong kong dollar exchange rates years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.

Named after the virality of internet memes found on social media, these stocks saw online communities form around them to boost and hype their prospects, even though meme company fundamentals remained questionable. Meme stocks refer to a select few stocks that gain sudden popularity on the internet and lead to sky-high prices and unusually high trading volume. While some Reddit traders were able to make a lot of money in a short amount of time by buying and then selling AMC and/or GameStop at the exact right moment, investing in meme stocks is generally very risky. Collectively, their independent actions have been shown to initiate short squeezes in heavily shorted names. As a result, meme stocks can become overvalued relative to fundamental technical analysis. A meme stock refers to the shares of a company that have gained viral popularity due to heightened social sentiment.

The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest. We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors. Meme stocks can take investors on a wild ride, both up and down, and it’s important to understand them in order to decide if they’re right for you. Plus, the entire event has caused suspicion of Wall Street strategies, as well as the ethics of the relationship between traditional financial markets and current investors. For an option with no expense ratio whatsoever, consider the Fidelity ZERO Large Cap Index (FNILX). Though the fund doesn’t technically track the S&P 500, the Fidelity U.S. Large Cap Index tracks large capitalization stocks, which the website says, “are considered to be stocks of the largest 500 U.S. companies.”

With the internet, chat rooms and discussion boards devoted to investing and promoting stocks also arose. In the late 1990s and early 2000s, these sites helped promote and drive up the prices of so-called dotcom stocks—a bubble that famously burst with far-reaching economic consequences. Just a day after the tweet from Musk, the stock rose to new heights once again. Then on Jan. 28, the stock reached a high of $483, before dropping to close the day at $193.60.

However, the stock fell steeply following the company’s announcement of the plan. SmartAsset Advisors, LLC (“SmartAsset”), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S. Risking money in speculative investments can be exhilarating, but it is rarely the path to long-term wealth. Investing in low-cost index funds and through tax-advantaged retirement accounts such as IRAs has a higher likelihood of success than relying on risky investing strategies. GameStop may have started the meme stock mania, but others have followed in its footsteps.

People learned major investing lessons during the craze, whether investors made money from meme stocks or not. According to the Schwab Q1 Trader Sentiment Survey, 35% of Charles Schwab and TD Ameritrade traders are more aware of their risk tolerance and factor it in before making momentum-based trades after the meme stock frenzy. And 22% are more careful about the sources they use for their investment research; additionally, 15% are more careful about diversifying their portfolios. GameStop, among the first meme stocks, is a prime example of how the retail investor community identified a highly shorted stock and used a short squeeze to work in their favor. Also, keep in mind any restrictions a brokerage may place around meme stocks. At the peak of the GameStop trading frenzy, for example, online trading app Robinhood limited the number of shares investors could trade.