Meme stocks are a subgroup of stocks that suddenly become popular on the internet, causing their values and trading volume to soar.
The buzz around a meme stock’s performance on social media drives its value, not the company’s actual results. Despite the possibility of enormous profits, meme stock owners are susceptible to suffering substantial losses if the stocks become inflated and their value rapidly declines.
The fact that memes emanate from social media means that their rise is typically fuelled by popularity rather than performance. However, when the hype cools and reality sets in, it can have devastating impacts on investors and companies. The most recent memory of what social media hype can do to a stock is the Gamestop mania of January 2021.
A lot of traditional investors and analysts warn that viral stocks can be extremely dangerous because they rely on small investors’ great interest to keep stock prices from plummeting too quickly.
Nonetheless, a mistake that many investors make is dismissing all meme stocks as being too risky to invest in. They often regret the missed opportunities later. When done correctly, investing in the right meme stock is quite sensible and can be very profitable.
Meme stocks pose a risk since their prices may rapidly outstrip their inherent value, leaving investors disappointed and prompting them to sell.
There’s no proof that a company’s operations are harmed simply because of the publicity around it. There is a reason why firms behind meme coins are getting so much attention. It could be because of their futuristic operations, a revolutionary CEO, etc. Such changes are often felt by the stock price.
If you decide to invest in these equities, you should expect to pay a premium and deal with greater volatility. Knowing the difference between justified hype and empty rhetoric is the key to success.
An overview of meme stock investing
People who want to trade the next big viral stock should only do so with money they can lose if it doesn’t work out. It’s a good idea to check your financial situation before you invest because things change fast in the meme world.
Even if social media trends or short-term expectations of a short squeeze are temporary, the fundamentals of the company, business, and investment trends can help to keep things in balance long-term.
You should consider the factors below.
- Go for a company whose financial standing is solid and has strong market fundamentals such as good profit margins and stable revenue.
- Diversify your portfolio: Because meme stocks are inherently risky, it would be better for you to spread your risk. This would also increase your profit potential in case all your stocks appreciate.
- You do not necessarily have to restrict your choices to companies with excellent fundamentals. Sometimes a company’s recent changes in management or new product line are all it takes to help propel a stock higher. Even if a company has poor financial performance, an aggressive plan to improve those outcomes over time can go a long way toward sustaining a stock price increase.
- Companies that have suddenly become meme stocks and whose management has yet to remark on what to do with their newfound power will have an added advantage if the current growth patterns continue.
- Reduce your risk: Sound financial management requires that you avoid investing more than 10% of your money in risky ventures like meme stocks. Beyond that, your long-term financial plans may be jeopardized. Aside from understanding that meme stocks are risky, there’s nothing wrong with doing so if you’re prepared to lose.
Pros and cons of meme stocks
Pros
- Owning meme stocks has some advantages due to the potential for a spike in buying interest.
- It carries significant potential for high profits in a short time.
- You may gain pre-market access to innovative new investment concepts.
- The meme stock movement may be here to stay since a youthful generation weaned on social media still have decades of investment ahead of them.
Cons
- Meme stock bets have the same risks as other high-volatility trades.
- Similar to earlier instances of virally inflated stock values, the meme stock trend may not be sustainable indefinitely.
- As a result, short-term stock price movements are unexpected and can result in large losses quickly.
- It’s not uncommon for meme stocks, which don’t trade based on any real fundamentals, to experience big declines in value.
In summary
Investors are drawn to meme stocks because of the promise of large profits in a short period of time. It’s better to construct a portfolio of meme stocks with a higher probability of giving returns over the long term than one with only a one-time chance of profitability. Be aware that meme stocks can be very volatile, so make your plans and be ready to invest more in the future.
