This is definitely one of those, “now I’ve seen everything” moments. Somehow, we as a society have allowed investing to fall right next to the mannequin challenge and planking. Unlike the latter two viral memes however, meme stocks have been making some people quite rich. So, my job here will be making sense of this social media madness so you can decide whether you want to dive head first into the shenanigans.
Before we dive in, you should be versed in a few terms (click the links to get a more in-depth explanation from Investopedia). Otherwise, this is going to become even more confusing than it already is.
Short selling: Short selling is an investment or trading strategy that speculates on the decline in a stock or other security’s price. Basically, if the stock price continues to drop, the investor makes a profit. If it increases, you’re left holding the bag.
Hedge fund: Hedge funds are alternative investments using pooled funds that employ different strategies to earn active returns, or alpha, for their investors. Here, you’re using combined buying power to increase dividends.
What is a Meme Stock?
It’s difficult to define exactly what constitutes a meme stock, but Yahoo Finance came up with a pretty good summation:
“A meme stock is any stock that’s seen excessive trading volume from retail investors who’ve targeted it on social media. In other words, this stock has “gone viral” on social media and has seen its price skyrocket as a result.”
Essentially, like your favorite TikTok video, people latch on to a particular stock (Gamestop, AMC, etc) and run with it. With so many people investing in the chosen stock, the prices experience a meteoric rise and those who got on board early enough have the opportunity to make serious bank.
Sounds awesome, right? Yeah. . .so, stocks are definitely a risk/reward kind of deal. Here comes the bad part.
When It All Falls Down
There are a couple downfalls to this power to the people movement. One is basically collateral damage while the other is more self-destructive.
Caught In the Storm
I take great joy in seeing “too big to fail” hedge funds take a hit at the hands of the common man. Unfortunately for those who may have their hard earned money invested in said hedge funds, there is a real risk of taking a MAJOR hit depending on where money is being invested. Forbes has reported the first official casualty of this Reddit era of investing: London-based White Square Capital. Others have taken severe losses that have shaken up the entire stock market.
Timing is Everything
The risk with any investment is knowing when to get in and when to bail. The added difficulty with meme stocks is the unpredictability. Just as quickly as the wolves descend upon a particular company’s stock, they can sell it off leaving you stuck in a rapidly declining situation. An article on Nasdaq gives a perfect timeline explaining how quickly things can turn on people who get on board too late.
Early Adopter Phase: A large handful of investors believe a particular stock is undervalued and begin to buy in large quantities. The stock’s price slowly begins to increase. This is the ideal time to get in.
Middle Phase: People who are paying attention begin to notice the increase in volume. More individuals then start buying, and the stock’s price skyrockets. You can still enter here but understand the risks.
Late/FOMO Phase: Word about the stock spreads across social media and online forums. Thus, fear of missing out—commonly referred to as FOMO—takes hold, and more retail investors join in. The stock is taking off at this point.
Profit Taking Phase: Sometimes, after a few days, buying peaks, and the early adopters begin cashing out. Just like the buying phase, the selling phase becomes a chain reaction as people fear losing money. This is where the price goes down.
But Can It Work?
Absolutely. The catch is you have to be pretty attuned with social media. Reddit and Twitter feature many subreddits and hashtags respectively that can help you tune into which way the wind is blowing. The key is to have funds ready to move during the previously mentioned early adopter phase.
The final wrinkle in making it work is deciding what kind of trader you want to be. Are you going to be the lone wolf retail trader or group up with friends and family? The major difference here is deciding whether you will pull from your own personal funds alone which can limit just how big you can go with your investments but grants you freedom to choose what you want or if you want to pool funds giving you greater reach to acquire more stocks which COULD equate to more money but you’d have to answer to your “investors” like a board of directors.
Which Path is Best?
Unfortunately, there’s no concrete answer. It comes down to a combination of personal preference, access to funds, friends, and family and your willingness to learn. Either path comes with one big note that comes from Alex Barrow aka Macro Ops via SeekingAlpha.com who says:
“The first difference between retail and pros is that professional traders don’t trade for income. If you’re working at an investment shop you get paid like a 9 to 5 job. And that’s super important because it takes a huge psychological load off your head.”
Having dedicated money set aside for investing can help put you in the right mental space to prosper. As the saying goes, never risk anything you can’t afford to lose.
If you’re really interested in taking the leap, I suggest creating an Auto-save on the Nav.it app specifically for your meme stock goals. Pick an amount along with how much and how often you want to save and you’ll be ready to ride the next wave without as much risk to your bank account.
As with any other investment, you win some and you lose some. Remember, not everyone talks about their losses so don’t be discouraged by a slow start or a setback. If you’re willing to do the work, gain the knowledge and pay attention to how the money is moving, investing can absolutely be a part of your financial freedom roadmap.