What are meme stocks and why are they so popular?

Summary

• Meme stocks see their trading volumes shoot up, not because of the company’s financial performance but triggered by the attention on social media or online forums.
• These stocks generally draw attention of the retail investors.
• Even as these stocks are popular, these can have far-reaching implications for an average investor. 

With stocks like GameStop and AMC hogging the limelight recently, the term ‘meme stock’ has crept into common stock market parlance and exploded in popularity. Meme stocks are the stocks that see an increase in their trading volumes not because of the company’s financial performance but on the back of the attention on social media or online forums. As a result, these stocks generally manage to pique the interest of retail investors.

Even as these stocks are popular, these can have far-reaching implications for an average investor. Here we will understand that in detail.

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How meme stocks grew into prominence

Meme stocks are generally not taught in the financial books. However, since these shot to prominence in a very short span, retail investors have become more interested in them.  A few popular meme stocks of the current times include GameStop, AMC, and BlackBerry. 

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These stocks surged significantly due to online forums’ attention, even as their valuation was not lined up with the price changes.  The surge in retail investing has made it easier than ever to trade individual stocks. It implies more people can now participate in these meme stock rallies. It has also been seen that these stock surges have been followed by crashes.

Should you invest in meme stocks?

Even as there is a risk-reward tradeoff involved with meme stocks, the volatility associated is much higher than other investments. The surge in prices of these stocks has also resulted in many investors becoming millionaires. 

However, investors should also know about the risks attached to these stocks. Unlike cryptocurrencies, these stocks have intrinsic value on account of their fundamentals; their trading is purely speculative.  The level of volatility associated with these stock makes their trading speculative.

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Exit strategy

The most essential thing while investing in these stocks is to have an exit strategy. The strategy helps you to identify the point at which you would sell the stock ahead of time. So, when your stock nears that point, you exit.

Rebalance portfolio

Since meme stocks trade with higher volatility, your initial 5% allocation could climb to 20% of your portfolio. So, you must know how to rebalance your portfolio when it increases in value much beyond your expectations. One way to hold prominent meme stocks with lesser risk is to invest in diversified exchange-traded funds instead.

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