During the past year, a new term, meme stocks, has entered the vocabulary of most traders. If you’re not fully familiar with the concept and would like to know more about it, there’s no better place to begin than with a definition. From there, review what’s been going on in the exchanges with these controversial securities, learn why the financial media is so biased on the subject, and examine some of the common pros and cons of dealing with meme stocks.
What are Memes?
In general terms, internet memes are typically images or videos that are spread, copied or altered, taking on a life of their own. For stocks in particular, memes defined as any company that has witnessed dramatic price rises and similar falls, primarily due to social media groups primarily on Reddit, that work in unison to make major buys. To successfully ride the meme stock wave, you first need a basic understanding of how share trading works. This guide from easyMarkets is a useful primer.
What’s Been Happening with Meme Stocks?
Social media is at the heart of recent developments in this niche. Companies like AMC Theaters and GameStop, (tickers AMC and GME respectively), were in a slump until a group of online trading enthusiasts decided to start buying and push up the price. This was partly motivated by the idea of causing losses for the hedge funds who held short positions in these shares. Prices quickly spiked and caused panic among the short sellers. In order to cover their shorted obligations, hedge funds had to rush out and purchase more stock. That, in turn, artificially drove prices even higher, into a massive bubble.
At the height of the bubble, those social media individuals who did the initial buying finally sold and earned huge profits. The cycle of outsized rises and falls has not been confined to AMC and GME. Many other companies that were suffering due to low earnings and weak fundamentals become targets of the social trading crowd.
Avoid Biased News
For many reasons, some obvious and others not, the mainstream news media despises the entire concept of meme stocks. Short selling and short squeezes, two features of the entire social-driven trading craze, have been around for decades. Institutions have traditionally been the entities to artificially drive prices up or down by coordinating huge purchases. But, now that the average person is doing the same thing, working in unison to affect the securities markets, all of a sudden unified buying and selling is a bad thing, to hear the media tell it. Anyone who wants a balanced report about meme trading is not likely to find it in mainstream financial sources.
Pros and Cons of Trading Volatile Shares
Every style of trading has its positive and negative aspects, and the same is true for buying and selling volatile securities. Pros include the chance to earn outsize profits, take part in fast moving action, and use leverage to magnify wins. On the downside, volatility often means unpredictability all around. People new to investing often misjudge shares that experience wild swings in value and stand to incur large losses. One way to protect yourself from the dangers involved is to set close stops, keep an eye on positions as the day progresses, and never invest money you can’t afford to lose.