Over the last few months there has been another surge in meme stocks (also known as Reddit stocks, WallStreetBets stocks, etc.), with equities in the United States reaching record highs. And, because of these record highs, businesses like AMC Entertainment Holdings (NYSE:AMC) and GameStop Corporation (NYSE:GME) have seen share prices jump up over 50% over the last few weeks.
- But, what are these new stocks?
- What is meme investing?
- Are these Reddit stocks significant for investors to monitor?
- Which stocks in the category should you keep a pulse on in 2021?
If you are new to meme stocks, subreddits like r/Wallstreet bets, and phrases like "hodl" or "too the moon" trading, stay tuned. In this guide, we will provide information on all of these topics, and more.
Reddit Stocks and Meme Investing
Thanks to social media and other relevant online platforms, "too the moon" trading was developed.
By creating investor interest on platforms like Facebook (FB), Reddit, and Robinhood, certain businesses have seen massive surges in share prices and volumes. These surges are speculative, but they have created what we now know as Reddit stocks or "meme" stocks.
As Nasdaq explains, these "stocks are triggered by small traders who cause a short squeeze on the stock. A short squeeze is a term used by market participants to refer to a phenomenon where short sellers who have placed their bets on a stock's fall, rush to hedge their positions or buy the stock in the event of an adverse price movement, in order to cover their losses. This leads to a sharp rise in demand for shares and a huge rally in share prices."
From these stocks has come the rise in meme investing. Although it is a newer concept, it is very popular with younger retail investors. But, meme investing can be very risky. The initial surge in price and volume is due to viral interest online; there is a good chance that the stock will also lose its value once the press settles. So, while you can make a lot of money in a short time, there is also risk for greater loss.
How Is This Happening?
Once the pandemic swept across the United States, people were forced to stay home, and there were significant layoffs nationwide.
With all of this spare time, the incoming stimulus checks, and the rise of platforms like Robinhood and Webull, it became more accessible than ever for retail investors to engage in the marketplace.
Combined with communication on social and messaging platforms like Reddit, TikTok, YouTube, Discord, and Telegram, there was an opportunity to force coordinated buys/sells on some of the stocks highlighted below. There was a similar effect in the market in the late 1990s when the dot-com era began to boom.
Dan Niles, the founder of the Satori fund, mentioned on CNBC, "What's new is the fact that these traders are armed with stimulus checks. They can organize more easily on things like WallStreetBets, they can work from home, and there's no-cost trading. Those are the differences."
A little background on the current stock scenario:
According to Forbes, the recent Reddit stock rise can be compared to similar trends from January of 2021, "when activist investors perched on Reddit's r/WallStreetBets board pumped struggling firms like GameStop and BlackBerry (BB) in a bid to hurt short-sellers.
This year, they have been incredibly volatile, almost crashing in late January once institutional investors piled out of their short bets after weeks of meteoric gains. Thus far, only AMC, which has also benefited from businesses reopening, has recouped those losses."
Should Investors Pay Attention to These Stocks?
Unfortunately, the answer to this question is not black and white.
Investors should pay attention to these stocks because it is crucial to understand what smaller traders are doing. However, finding financial success through investments in these volatile stocks is a risky business, and there is a high chance that you will not see a return.
Because the price is superficial and created by viral engagement online, their peaks are almost always followed by inevitable crashes that are difficult to predict. But, if you can get in early enough, pay attention to key communication channels like r/wallstreetbets and key YouTube influencers; there is a chance that you will find a high return on investment.
To understand when and how you can potentially make a high return on Reddit stocks, we turn to the site itself. The subreddit WallStreetBets explains that there is a Reddit Reddit stock cycle, which is outlined below.
If you want to invest, understanding this cycle is crucial in recognizing when to take this risk. But, it is essential to remember that the valuation often may not align with the hype.
The Meme Stock Cycle
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.
To make money on these Reddit stocks, you need to know how to take advantage of this system.
Meme Stock FAQs
Here is a list of some of our most frequently asked questions about meme stocks.
At Schaffer's Investment Research, it is our mission to bring you actionable and educational information. If we haven't answered one of your questions below, please contact us for live trading support.
What is a retail investor?
A retail investor is also sometimes referred to as an individual investor. They are not professional investors but instead tend to execute all of their trades through online brokerage firms, mobile applications, and other types of accounts.
What is shorting a stock?
Shorting a stock, also known as "short selling," is a technique that experienced investors and hedge fund managers use to create enormous profits. It can be risky, in that there is a potential to lose a lot of money too.
According to the U.S. Securities and Exchange Commission (SEC), "A short sale generally involves the sale of a stock you do not own (or that you will borrow for delivery). Short sellers believe the stock price will fall or are seeking to hedge against potential price volatility in securities that they own.
If the stock price drops, short sellers buy the stock at a lower price and profit. If the cost of the stock rises, short sellers will incur a loss. Investors may use short selling for many purposes, including to gain from an expected drop in a security's price, to provide liquidity in response to unanticipated buyer demand, or to hedge the risk of a long position in the same safety or a related security."
What does "meme" mean?
According to Merriam-Webster Dictionary, a meme is "an idea, behavior, style, or usage that spreads from person to person within a culture; an amusing or interesting item or genre of items that is spread widely online especially through social media." Graphic memes have become a popular form of communication on social networking sites like Facebook, Instagram, TikTok, Reddit, and Youtube.
If I want to start investing in these stocks, do I need to pay attention to Reddit?
Yes, it is recommended to pay attention to Reddit and YouTube if you want to invest in these stocks. Because so much of the demand is driven by these platforms, it is essential to keep a pulse on their chatter, especially if you are interested in being ahead of the market and knowing ideal times to sell.
Do you think "meme" stocks will become irrelevant as the pandemic comes closer to an end?
The answer here is uncertain but unlikely. There is a chance that once people begin interacting and traveling as the threat of COVID-19 starts to lessen that these stocks will become less relevant in the marketplace. However, later institutions for many years have been using this technique to experience higher gains. Unless specific regulations are passed to forbid this type of trading, you have to believe that retail investors will continue to execute these trades.
Is the Securities and Exchange Commission (SEC) suspicious of these stocks?
In May 2021, the New York Times (NYT) reported that "Gary Gensler, the new chairman of the Securities and Exchange Commission, said at a House Committee on Financial Services hearing that the SEC's staff has been working on a report addressing the issues raised by the GameStop episode that will be released this summer. He also said new rules may be needed for brokerage apps that turn stock trading into a game or contest, a method called gamification."
We will see what is released this summer and if there are any significant implications from this report. But, the SEC is watching to understand the environment around these trades better. At this time, no current regulations are forbidding this type of trading.
Meme stocks are driven by viral engagement on a social media website; they can be highly volatile. Even if you decide that Reddit stocks are too risky for your portfolio, it is beneficial to keep a tab on what smaller traders are doing in the marketplace. If you want to invest, understanding the Reddit stock cycle is essential to support at the right time to get the best return possible.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.