Selasa , Mei 28 2024

What Investors Need to Know About Meme Stocks

Buying up cheap shares to have them skyrocket in price results in a large payout. Investopedia reports that Single Stock ETFs have been introduced to provide “leveraged long or short positions” on meme stocks like Tesla. Another similar short squeeze occurred during the summer of 2022 when meme stock communities drove up the price of the Bed, Bath, & Beyond (BBY) shares by 314%. In the case of GameStop (GME) members of “r/wallstreetbets” bought up shares with fervor, knowing hedge fund managers counted on it as a shorted stock, eventually driving up the price from $2.75 per share to $500 a share. A short squeeze is when a shorted stock’s shares rise sharply in price and buyers close out to avoid losing big.

  1. GameStop (GME) became a heavily shorted stock due to a decline in foot traffic at malls and dwindling revenues.
  2. This is known as a short squeeze, and it accelerates a stock’s price increases as more and more short sellers are forced to bail out to cut their losses.
  3. Plus, the entire event has caused suspicion of Wall Street strategies, as well as the ethics of the relationship between traditional financial markets and current investors.
  4. Expense ratios (basically the management costs) for its ETFs and mutual funds are some of the lowest around, with an average of 0.10%, meaning every $10,000 invested costs $10 annually.
  5. Meme stocks can take investors on a wild ride, both up and down, and it’s important to understand them in order to decide if they’re right for you.
  6. In 2020, partially due to the COVID-19 pandemic, home furnishings retailer Bed Bath & Beyond was forced to close over 20% of its stores across the U.S.

The cycle (the Short Squeeze) may continue for an extended period of time, or be limited to a few days. If you’re excited about investing in meme stocks, but don’t love the risk of holding a singular stock, the Roundhill exchange-traded fund MEME offers investors exposure to 25 meme stocks in one ETF. The SoFi Social 50 ETF (SFYF) and VanEck Social Sentiment ETF (BUZZ) hong kong dollar exchange rate are similar — they track stocks with positive sentiment among traders and social media users, and thus have substantial exposure to meme stocks. Without their cult followings, meme stocks are not necessarily valuable assets. These online communities, such as the popular Reddit forum WallStreetBets, coordinate buying and selling efforts to influence stock prices.

This led to user outrage along with class action lawsuits as well as regulatory fines and restitution of approximately $70 million. The main victims of the squeeze ended up being a handful of hedge funds, some of which were forced to shut down due to heavy losses. As a result, the meme stock concept adopted a David vs. Goliath or Robin Hood connotation of taking from the rich Wall Street elite and rewarding the small retail investor. There’s a case to be made for investing in meme stock, though there are some risks involved. On the other hand, those investors who held on to their GameStop shares after this peak would have seen their value drop back to just over $40 by mid-February. As of mid-July, the stock had clawed back some of its earlier gains, trading at around $166 a share.

Though the idea of amassing crazy wealth overnight is obviously appealing, the reality is that the odds are heavily stacked against anyone trying to outsmart the market. The meme investors who walked away with a lot of money were arguably just very lucky. These ETFs hold familiar meme stocks such as Gamestop and AMC, and they also hold a few stocks some wouldn’t think to call meme stocks, such as Tesla and Peloton. However, critics argue that their price performance and appeal have little to do with their fundamentals and much to do with their entertainment value as speculative playthings, much like casino games.

Robinhood’s CEO said the restrictions were to help the brokerage meet increased regulatory deposit mandates. When you’re ready to buy stocks, your first need to open a taxable brokerage account. Robinhood and Webull are two popular trading platforms for active investors, boasting easy-to-use mobile investing apps. Plus, they offer IRAs (traditional, Roth and rollover) so users can manage their retirement funds along with their stocks all in one place. While it is possible to make money with meme stocks, it is an extremely risky venture.

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. Roaring Kitty’s real name is Keith Gill who was also on Reddit as u/deepF…Value and active on the subreddit r/wallstreetbets.

Social chatter around the stock grew so loud that GameStop’s price surged by 400% in January. If you’re thinking about buying and selling meme stocks, keep in mind that you will probably have to pay taxes on your profits. Capital gains tax rates are especially high on stocks you held for less than a year. While some thought that the meme stock craze would be short-lived, the phenomenon remains in force months later. Meme stock communities pumped the brick-and-mortar retailer Bed Bath & Beyond (BBBY) to extreme levels in the summer of 2022 when it was up 314% for a short period before crashing back down. A few days later, the former CEO of and investor Ryan Cohen purchased an unknown amount of GME stock, which Gill acknowledged on Twitter (now X).

Phases of a Meme Stock

But meme stocks also remain very volatile and risky, and retail investors are likely to be the ones to experience the most losses if it all comes crashing down. Memes began to take the form of humorous social media posts and viral videos with the advent of the internet. Meme stocks are so-named because ideas about them spread rapidly on social media and web forums. Meme stocks also see communities built around them that promote the hype and elaborate on the original meme, inventing specific terms and symbols to accompany the stock. GameStop’s stock price then surged due to a massive short squeeze affecting some major hedge funds that were short the stock and forced to sell to cut losses. As mentioned above, the stock price went from less than $5 a share to $325 (by January 2021) in less than six months.

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As the stock went viral, more investors joined in to reap the profits and some hedge funds suffered major losses as a result. Investing trends come and go, and the rise of the meme stock is one of the latest to make the rounds. Defining meme stocks is difficult, but generally they’re stocks that manage to gain a lot of attention from investors thanks largely to social media chatter. Meme stocks can sharply boost your portfolio’s volatility, which is something a financial advisor can help you manage.

In November 2020, it became public knowledge Cohen owned a 10% share in the company. By closing two days later, the value doubled; an 8x increase from the price at the time of Cohen’s and Gill’s previous posts. There is also collaborative element to the online chatter that drives meme stocks, and a community found in joint narratives built around potential meme stocks. As internet chatrooms have abounded and market watchers found a place to share ideas and build a plan of action, “meme stocks” were born. There were howls from investors, politicians, and business people who accused Robinhood of manipulating the market.

What are Meme Stocks?

Part of the motivation behind the online support for certain meme stocks comes from hedge funds’ short positions in those companies. From there, the number of retail investors buying shares and call options snowballed, driving up the price. The price increase drove out some short sellers early on as it attracted various big-name investors and public figures, such as Elon Musk and venture capitalist Chamath Palihapitiya. As the price of the shorted stock rises, the short seller will begin to experience losses. These losses must be covered in a timely fashion, often prompted via margin calls, whereby the broker demands funds to make up for those paper losses. The meme stock craze, driven largely by investors on social media platforms and in online forums like Reddit, caused certain stocks to go viral.

The short interest, therefore, had grown to over 100% of the shares outstanding. The case that a short squeeze could be precipitated was then developed and touted on Reddit and other investment forums. In addition, big investors, such as Scion Asset Management’s Michael Burry and Chewy co-founder Ryan Cohen, also took long positions. One of the features of meme stocks, especially early on, has been that they tend to be heavily shorted names. This means that there is a lot of short interest in the stock, or that a large proportion of the company’s outstanding shares have been sold short.

Investing in Meme Stocks

Meme stocks have also caused traders to be more aware of what sources they use for investment research. Short selling does put the investor in a vulnerable situation, at risk of rising stock prices, especially continually rising stock prices or big upside moves. A Short Seller benefits when the shares of the stock they have targeted decreases in value, but alternatively suffers losses if those shares rise in value. There is no doubt that it can be exciting to make money on day trading and to be a part of something bigger, such as in the case of the GameStop surge. And yet, studies have shown that even the most experienced of day traders lose money. So while it might be a positive thing that these meme stocks have increased interest in the stock market, in the end, experts recommend following a much more prudent investing strategy.

Experts generally suggest keeping individual stock picking limited to 5% to 10% of your overall investment portfolio. A broker like Vanguard is a good choice for passive investors who want to hold funds long-term as it doesn’t offer many tools for those who are more active traders or interested in short-term trading. Expense ratios (basically the management costs) for its ETFs and mutual funds are some of the lowest around, with an average of 0.10%, meaning every $10,000 invested costs $10 annually. Investing in a single stock usually carries more risk than investing the same amount of money in several different stocks. Diversification across multiple investments helps buoy your portfolio in case one investment sinks. In 2022, Bed Bath & Beyond announced intentions to sell 12 million shares in a secondary offering as meme stock promoters pumped the value of its stock.

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