Meme stocks may seem like they dominate the financial news headlines these days, but the term didn’t even exist just a few years ago. Now, meme stocks are essentially an asset class unto themselves, and it seems like they have staying power. But, what exactly are meme stocks, and how are they transforming the stock market? Here’s a quick overview of the meme stock phenomenon, what it means, and what you should look out for if you’re considering investing.
What Is a Meme Stock?
A meme stock doesn’t have a specific classification, as it’s a relatively new phenomenon. However, as a general rule, meme stocks have shown one or more major surges in price, backed by waves of traders who promote the stocks on social media and message boards. In other words, meme stocks show dramatic price gains on nothing more than rumor and group buying, rather than any changes in their fundamental nature.
What Draws Traders to a Meme Stock?
Traders are drawn to meme stocks for the same reason they are drawn to any stock: the prospect of making money. As meme stocks have shown astronomical price swings in a short amount of time, an expert — or lucky — day trader can double their money or even more in a short period of time.
There’s also something of an “anti-establishment” movement that has developed around meme stocks. Some traders buy meme stocks to inflict financial pain on big institutions that are betting against these stocks. It’s also seen as a way to take back the power from elite Wall Street traders and instead distribute it amongst everyday traders, who traditionally have had almost no influence over the stock market.
What Market Conditions Have Facilitated Meme Stock Trading?
There are two main market conditions that have helped facilitate meme stock trading: zero-commission trading and online message boards/social media. Most online brokerages, including some major financial services firms, now offer zero-commission trading for most stocks and ETFs. This allows traders to move in and out of stocks quickly without having to worry about the trading costs involved. The rise of online message boards touting various stocks has also played a role, as ideas can be disseminated quickly and many traders can pounce on a stock in a short time.
What Do Meme Stocks Mean for the Future of the Stock Market?
Speculators have always played a role in the stock market, and the evolution of meme stocks is just another example of this. While meme stock traders won’t do anything to alter the fundamental nature of the market as a whole, when combined with the rise of $0 commissions and rapid-fire trading, it does mean that investors should keep closer tabs on their portfolios to make sure they don’t get caught up in the frenzy, either on the way up or on the way down.
Check Out: The Top 10 Stocks for 2021
Are There Dangers to Meme Stocks?
Stocks in general carry various investment risks, including the potential that you could lose all of your money. Meme stocks are no different. In fact, the danger to your capital is actually greater with meme stocks than the general market, because meme stocks by definition are highly volatile.
A stock that trades up 400% in a single week, like GameStop, can easily shed 50% or more of its value overnight. Since it can be difficult to impossible to know exactly where a meme stock is headed at any given moment, investing in meme stocks is inherently risky. If you go down this path, know that you shouldn’t be allocating more than a few percentage points of your total portfolio to meme stocks, and the money you invest should be money you are willing to lose. Talk with your financial advisor to see if even that small allocation is appropriate for you given your investment objectives and risk tolerance.
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Last updated: Sept. 20, 2021