📈 Meme Stocks

TLDR: Meme stocks are captivating and unpredictable. Unique beasts in the stock market. Capable of delivering both triumphant victories and harrowing losses. These stocks defy conventional wisdom, driven by social media hype rather than fundamentals. They can inflate to astronomical values but are generally not a good investment. Keep reading to find out more!

• Meme Stocks

• The GameStop Case

• The Risks

• Gambling vs Investing

• Final Thoughts

Meme Stocks

What is a meme stock?

According to Investopedia: “Meme stocks are shares of companies around which online communities have formed to promote and build narratives.”

What makes them so interesting is their unpredictability that leads to great success stories.

But more often than not, to tragedies.

They are those few stocks that suddenly blow up and their price goes through the roof and beyond.

How is a meme stock born? Well, I can assure you that is not because the company is doing necessarily well. In fact, it is often the opposite.

It’s mostly due to hype on social media.

You can view it as the stock market’s equivalent of a funny viral video that a week later everyone realizes wasn’t all that funny.

By the moment you hear about them it is already too late to invest in them.

The GameStop Case

Picture this: back in January 2021, GameStop was doing super bad, to the point of going bankrupt soon.

Many professional investors were betting against it by “shorting the stock”.

That strategy consists of 1) borrowing shares, 2) selling them immediately for a “high” price, and 3) buying them back later at a lower price to return them to the person you borrowed it from.

So you basically make money when the price goes down.

Suddenly, a bunch of folks from r/wallstreetbets decided to team up to buy GameStop stock like there was no tomorrow. There was an emotional element to this. It was the nerd gamers against the finance jocks.

Guess what, the nerds won (at least for a while). The stock price skyrocketed. At its peak, it was worth over $500 per share. This started from around $17 at the beginning of the month.

Some stock trading apps stopped people from buying GameStop shares citing various ehem reasons. Some saw this as an attempt to protect the big guys from the little man.

This move ticked off a ton of people. Lawsuits flew and there were even congressional hearings about the whole ordeal.

Anyway, it became popular and hit its highest value ever.

However, it was only a matter of time before the stock returned to a reasonable price.

And that, my friends, is the problem… here’s why.

The Risks

Well the big obvious risk is losing your hard-earned cash.

Unless you buy the stock quite early, that’s what is probably going to happen. And knowing when “early” is, is pretty much impossible.

Meme stocks lack strong fundamentals for their price jumps, like growing profits.

It’s all hype, and when the hype cools down, prices crash in the blink of an eye.

In other words, they are riding the rollercoaster of public opinion.

They can go from “to-the-moon” to panic selling real quick.

Some may bounce back to normal; others could stay in that wild ride for a while before they settle.

Investors who bought meme stocks when the hype was high usually end up with stocks worth less than what they paid.

Very simple.

Gambling vs Investing

Let’s get things clear, investing and gambling are two different things.

Gambling is all about luck.

You pick up the right card, roll the dice, and that’s it.

No matter what, you cannot control the dice, nor have a hint of how it will land.

Investing has some luck factor but the biggest difference with a casino is that the odds are stacked up in your favor over the long term.