Meme Stocks: Things to Know Before Investing

Shares are securities that give stockholders ownership of a company, which issues them on share markets to raise capital. There are various types of shares, including large-gap, value, preferred, common, and growth.

However, have you heard of something called meme stocks? The name itself is pretty fascinating, and so is the reason behind it. It refers to a type of stock that gains rapid popularity amongst investors through social media and online platforms.

If a particular share of this kind garners sufficient online support, it increases its price in the market, regardless of the company’s total value. Many people choose to invest in them because of the potential for higher returns.

Meme stock

But before investing in these types of shares, it’s advisable to have more information about them and seek professional investment advice. Even though they can be suitable long-term investments, they have some risks.

Here are some things that will help you get a clear idea about them.

When did they become popular?

As mentioned earlier, these shares become popular through sharing on social media platforms. They emerged in the year 2020, with GameStop being the first share of its kind.

Various trading and investing apps are actively involved in making day trading of these shares accessible, resulting in many retail traders coming together to buy stocks of multiple companies.

It results in a phenomenon called “meme stock mania,” which is immensely profitable for retail investors but results in losses for institutional short sellers (which involves selling a stock in which the trader has no ownership).

Brokers involved in voluminous share dealings have always been uncomfortable with these stocks because they show the ability of small-time investors to manipulate the market by working jointly.

It represents a significant shift in stock trading, especially day trading (which involves buying and selling securities within a single day).

How do these shares work?

Online traders use various forums to identify target stocks and then work together to promote them through discussions, posts, and CTAs on Reddit, Facebook, Twitter, and other platforms. The question here is, how do the investors identify the stocks?

Hedge funds and institutional traders are bearish against companies with these shares. Being bearish, they resort to stock shorting to benefit from its falling share prices (stock shorting is a strategy where investors borrow shares from brokers and sell them in the open market, hoping to rebuy them when the prices fall).

However, the retail traders prevent the prices of meme shares from falling by coming together and buying them in large numbers, thus increasing their value while preventing the institutional traders from making a profit.

Benefits and risks associated with them

The biggest advantage of these stocks is profitability, as they witness a rapid increase in value when investors work together. Some have also welcomed the phenomenon because it leads to market democratization, in which more people buy and sell stocks.

However, these shares come with high volatility, as many people could exit their stocks in the short term or when they find another with better fundamentals and potential.

What are some of the famous stocks?

Some of the popular stocks that have gained popularity through meme-sharing on social media are Blackberry Limited (BB), AMC Entertainment Holdings Inc. (AMC), Robinhood Markets Inc. (HOOD), and Bed Bath and Beyond (BBBY).

Meme stocks carry advantages and risks, so you should be careful before investing in them. Despite being a recent phenomenon, they have caught the attention of investors and traders worldwide and have taken stock markets by surprise.

(Visited 67 times, 1 visits today)