People prefer to invest in stocks because of their high potential for returns, which is undoubtedly higher than alternatives like gold, certificates of deposit, real estate, and equity crowdfunding. Despite the market’s volatility, it continues to attract a large number of investors.
Interestingly, social media affects the stock market in many ways, for example, creating investment hype. The best example is meme stocks, which became popular in 2020 when an investing app played a major role in popularizing it on its platform.
There are some popular websites where you can learn about meme stocks and receive valuable advice related to investment in various areas, including fine arts, which has high-profit potential. The question is, what are these stocks, and why are they called so? What are some things you should know about them?
Why are they called meme shares?
They get their unique and perhaps eccentric name from being popular on social media platforms. Traders share memes, initiate discussions, and share posts on platforms such as Reddit, to build hype and increase their prices in the share market.
However, even though their market prices witness an instant increase, it is usually short-lived because they do not represent the company’s strength or value. Inevitably, the costs come to fall as quickly as they rise.
What is the stock cycle?
You will clearly understand their working mechanism through their stock cycle, which is mentioned briefly below.
Early adoption stage
A limited number of investors, usually short-term, identify stocks that they believe are undervalued and short on the public market by hedge funds and institutional traders.
Once they identify the share, the investors come together to buy that in large numbers, increasing its overall value.
When the prices of the stocks increase, other traders, including those on Reddit and other platforms, come forward to buy them, thus increasing their total trading volume. This leads to a dramatic increase in their prices.
The fear of missing out leads more investors to buy the shares as the news of their increasing value circulates on forums and social media platforms.
Flash selling stage
It is when buyers start selling the meme shares because they have reached their highest value. Following them, more sellers start selling for fear of losing a profit-making opportunity, eventually leading to a drastic fall in value.
How does the process work?
Investors buy these types of shares to avoid institutional traders from being bearish on a company, which they do by betting large amounts of money against it. When institutions are bearish, they resort to short selling to profit from its decreasing price.
In short selling, a trader borrows a stock from a broker (from their inventory or brokerage firm) and then sells it, with the amount being a credit to their account.
The entire process carries a risk. Since the trader has resorted to shorting by borrowing the shares, they must cover it by buying them and returning them to the broker. Most traders do this when the stock’s price is at its lowest, thus making a profit in the process.
But here is where meme buyers make a difference by buying the shares in large numbers when they are at their lowest, thus increasing their prices, causing the hedge funds to suffer a loss while short-selling them.
Should you invest in them?
Even though these shares have a lot of potential for profitability, they also carry a certain amount of risk. The risk comes from the unpredictability they are subject to on internet board discussions, message forums, and social media platforms.
Before investing, you should also be familiar with the glossary of associated terms, including diamond hands, BTFD, apes, and paper hands.
You should thoroughly learn about meme stocks before deciding to invest in them, or better yet, seek professional advice from investors. However, it is interesting to know how social media can affect the working of shares and its impact on the share market.