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Trading and Investing in Meme Stocks

Meme Stocks
Written by David Morrison

In early 2021, meme stocks dominated the headlines. The stock prices of certain companies, such as GameStop, AMC Entertainment and Bed, Bath & Beyond showed exceptional volatility.

These stocks soared and slumped, soared again and dived, giving fleet-footed, and lucky speculators the opportunity for exceptional profits, and others the risk of crushing losses. But interest in meme stocks fell just as quickly as it rose as speculators appeared to tire of the immense volatility. Yet recently there has been renewed interest in some of these companies.

What is a Meme Stock?

A stock becomes a meme stock when it suddenly gets lots of attention on social media. Typically, meme stocks are US companies with a small-to-medium-sized market capitalisation. It also helps if there’s a large outstanding short position on the stock, as a concentrated buy programme often means the shorts are forced to cover, helping to drive up the price. The original poster child must be GameStop, a tired old bricks-and-mortar games outlet. In early 2021 the stock price soared from just under $20 to over $480 in a fortnight. The catalyst came as retail traders banded together via the WallStreetBets thread on Reddit and took on the hedge funds shorting the stock.

Other Prominent Meme Stocks

It didn’t take long for the retail crowd to identify and create other meme stocks including AMC Entertainment, Blackberry and Bed, Bath & Beyond. While the trade in meme stocks was driven by a flood of gung-ho retail traders, Wall Street was also quick to get involved. It always is when it sees a money-making opportunity, particularly when it knows it has an edge. Originally, Wall Street was caught on the wrong side of the trade. But hedge funds adapt rapidly, and it wasn’t long before they were harvesting profits on the back of sky-high volatility.

Nothing new under the sun

The popularity of meme stocks is similar to the trade in gaming stocks just ahead of the Great Financial Crisis of 2008/9. In both cases the manic trading is carried out by a relatively small crowd of risk-tolerant traders convinced that they’re able to ride the wild price swings and get out before the bubble bursts. In all trading fads the motivations are the same, only these days we have a couple of acronyms to help us understand them: FOMO, or fear of missing out, and YOLO, you only live once.

High Risk

Speculating on meme stocks comes with significant risks. These stocks are known for their extreme volatility, and it can be difficult to predict when and how they will move. As always, it’s important for investors to do their own research and carefully consider the risks before investing in any stock.

By David Morrison, Senior Market Analyst at Trade Nation

81.7% of retail investors lose money when trading CFDs and spread betting with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

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David Morrison

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