Meme what? This is exactly what we also thought when we came across this “phenomenon” very recently. Investment lovers as we are, of course our attention was immediately caught. We dived in and give you the answer to the question: What are meme stocks?
No joke
In investing, you invest your money with the intention of increasing the value of your deposit over an extended period of time. There is always a
risk
fixed and so, as far as we are concerned, investing is serious business.
When investing in stocks, it is wise to familiarize yourself with in the financial and economic performance of the company you want to buy stock in. This represents the value of your stock and you want to assess whether this stock will increase in value in the future because the company is doing well. And not to forget: the
dividend
What some companies pay out on their shares when business is good.
Now we’ve talked before about
investing versus speculating
And what the differences are. Investing is done primarily on the basis of informed choices and for the long term. Speculating or day trading is more short term work where you hope to make money with your stocks in a short period of time (with a little luck). And with meme stocks, speculation – or day trading – applies. So if you expect meme stocks to have anything to do with the funny gifs you see passing by everywhere and nowhere, you need to adjust your expectations. Meme stocks are no joke.
Luck or wisdom?
Meme stocks are characterized by the fact that they increase (and can decrease) tremendously in value over a short period of time and are often “overprized. This means that a stock is worth more than what the company is actually valued and performing at, we also call this overvaluation. Buying these stocks and then selling them again at a profit requires precise timing (or a dose of luck).
How then?
An overprized meme stock occurs because a lot of this stock is bought in a very short period of time. Something characteristic of daytraders. This is for a wide variety of reasons, such as hype (think a tweeting Elon Musk about bitcoins), “delusion of the day” or FOMO (Fear of Missing Out). The performance and appraisal value (valuation) of the company in question is often not 1 of them.
AMC + Gamestop
A great example of a meme stock is the AMC cinema chain whose stock price has skyrocketed in recent weeks. Pretty odd in corona time when most of the cinema chains have been dealing with prolonged closures, don’t you think? Or how about Gamestop. This stock went through the roof earlier this year. What exactly happened? A number of hedge funds had huge “short” positions on this stock (speculating on a price drop). Then this “news” was picked up by investors, causing a decision to buy this stock en masse, to thwart the hedge funds, which caused the stock price to rise ($15-$345 → 2200%). Thus, the hedge funds ran into trouble because they had bet on a price decline. This was actually a bit of a pay-back action toward the hedge funds because they were forced to buy back the stock at a substantially higher price.
‘The 4 stages of happiness…or bad luck?’
The course of an artificially high share proceeds through the following characteristic stages.
- Early adoption
Investors buy up shares in large numbers (for whatever reason) causing the price to begin to rise.
- Mid-stage
The trading volume and price increases in large numbers due to the purchase. Other investors see this and buy this stock as well.
- FOMO
The stock becomes a hype and everyone wants in, Fear of Missing Out rears its head, resulting in even more buying of the stock.
- Profit Taking Phase
The stock reaches a peak value and Stage 1 buyers sell their shares to grab the profits. This in turn leads to this chain reaction because investors are afraid of making losses. The share price is making a free fall as a result.
Where can you find “Meme stocks?
Meme stocks can mostly be found on Internet forums, the most famous example of which is surely Reddit. The process before a stock becomes a meme stock is a complicated one and depends a lot on hype and speculation. Want to dive into the matter yourself? If so, check out #Wallstreetbets on Reddit. Ultimately investing (speculating we would rather say) can be done through brokers.
Invest wisely
Investing is done for the
long term and with a strategy
. After all, you invest to meet your predetermined financial goals.
Of course you are free to daytrade meme stocks but be prepared for volatile prices and know that you can lose money. However, we are not fans of investing in meme stocks; we are serious about our money. However, do you have some “play money” and want to join and see how this works? Again, make sure you do this with a plan and strategy so you know when to get out and stick to it.
