What Is A Meme Stock?

 

When it comes to investing, trends come and go, and the escalation of a meme stock is the latest to become widely popular. Explaining meme stocks is difficult, however, they’re stocks that manage to grasp a lot of attention from investors due to social media gossip. They might be growth stocks, value stocks, with large-cap or small-cap. They can speak for a diversity of industries and market sectors. Meme stocks can aggressively increase the volatility of your portfolio, which can be helped by a financial advisor.

So what is a meme stock? Well, meme stocks can be tricky to define for a simple reason: meme stock is currently considered a new phenomenon. 

A meme is a wide phrase that’s used to explain an idea or running joke that gets reused on the internet, usually through social media. Memes get shared on social media platforms and the ones that are mostly shared can become part of a collective phrase. 

A meme stock could be described as a stock that gains popularity from a large group of people due to the huge influence of the internet. A prime example of this is GameStop (GME). In early 2021, this particular stock took off by storm due to the Reddit community of WallStreetBets. Social gossip surrounding the stock became so loud that GameStop’s price skyrocketed by 400%.

Pinpointing the nest meme stock trend can be challenging, as they’re not quite growth stocks or value stocks. They may be exaggerated in value or underpriced. Meme stocks can belong to new companies or more established ones. There’s no proper way to determine which company will end up becoming a meme stock target for investors. 

However, social media tends to fuel importance to them. That’s what took place with GameStop as everyday investors grouped to push the price of the stock “to the moon,” slightly in the rebellion of hedge fund investors who had bet in opposition to the company. As the stock became hugely popular, more investors joined for the piece of the pie and a few hedge funds suffered massive losses as a result.

YOLO and FOMO are usually connected to the push of the meme stock. They stand for “you only live once” and “fear of missing out,” commonly, they’re usually mentioned in terms of how they impact the behavior of millennials and Gen Z, particularly in the way they deal with money. When meme stocks are trending, investors may sway towards a stock due to being afraid that they’ll miss out on an opportunity or because it is what everyone else seems to be doing. 

So are meme stocks a good buy? There’s a case here to be made for investing in meme stocks, however, there are a few risks present. In the instance of GameStop, investors who bought in when the stock remained trading at $20 a share and sold when it reached nearly $350 a share in late January could have a clean profit of roughly $310 per share. However, investors who held on to their shares of GameStop after this surge would have seen their value fall back to just over $40 by mid-February. They would have remained ahead at this point but by a much smaller margin. In mid-July, the stock had taken back some of its earlier gains, trading at roughly $166 a share. So to say the least, investing in a meme stock can be a bumpy ride. 

That may not be an issue for younger investors who have a larger risk appetite and a longer time frame to recover from losses. However, investing in meme stocks can be a portfolio mismatch for a middle-aged investor or someone near retirement.

The major issue with meme stocks is that it can be challenging to tell which ones will skyrocket and for how long. In the case of GameStop, the boost came out of nowhere and the downfall was even faster. Investors who were hoping for a long-term increase in pricing may have been let down by how fast it reversed. 

Meme stocks can be attractive since there’s room for profit to be made if stock becomes popular. But they aren’t quite a long-lasting bet for a portfolio, especially for investors who may lean towards more conservative investments. 

One may profit from investing in meme stocks, at least in the short term, however, there are some risks to keep in mind. They certainly add some fun to your investment portfolio and, for a specific type of investor, tend to solely focus the mind. But the risk involves price movements that tend to be fueled by more investor speculation rather than fundamentals. Time will tell whether the meme stock will end up becoming a permanent attachment to the financial markets.