3 Things to Know Before Buying a Meme Stock

meme stocks for beginners

*This blog post is my personal opinion only and may contain affiliate/referral links.

Gamestop and AMC. You probably heard the craze with these two popular meme stocks. It skyrocketed to the moon and made some millionaires. But it is important to mention that many had also lose big time.

Meme stock, in a loose definition, is a stock powered by the short squeeze of retail investors. A short interest in the stock push the price higher and carry the investor’s money to atmospheric heights.

New investors should be very careful though when trying to get into meme stocks. Volatility is the key term to understand. While many are enamored at how high the upside is, it should also be cautiously considered how the downside can bury your money in a flash.

Built on Hype

Your guess is as good as mine when you think Reddit and Twitter are probably the primary movers of a meme stock’s rise. Social media, particularly niched to the stocks and finance, can spread the hype of a meme stock. You can count notable personalities and influencers too in accelerating its popularity.

And it’s not just the stocks, Elon Musk, CEO and founder of Tesla Motors, once fueled the rapid ascent of DOGE coin with his tweets. With this example, we can see how investors feel the pulse of what stock or crypto is trending and join the bandwagon of meme stock buyers.

Missing Fundamentals

I read somewhere that meme stock short sellers pick beleagured stocks, which is true with GME and AMC, and pump them so they would be revived. Whether this is factual or not, i think majority of stocks had taken a deeper dip during the pandemic. Some stocks had it worst though, and i can only speculate how a meme-stock-in-the-making is chosen.

What defies the mind is how these meme stock companies are missing the fundamentals of a great solid companies, and yet it looks very established by how the stock is performing at the time of the pump. As mentioned above, these are companies are already down and negative or on the brink of bankruptcy. The big volume during trading is very deceiving too; the frenetic activity is not a clear indication that the stock is going up but it could mean the opposite.

Investing Entry and Exit Strategy

Because the shift of the market on meme stocks are unpredictable, it would be wise for an investor to manage and control his or her losses at the beginning of the trade. It means that before the volatility set against his or her favor, cap it off with an amount that he or she is willing to lose.

It is important to define your goal for investing on meme stocks. Are you willing to take some losses and hold the stock long so you will catch the pump bonanza? What are your portfolio allocation with meme stocks?

Consider other factors too and keep your ears open for current positive news on the meme stock company and also a watchful eye on the company’s technical charts. What an investor should look at is a semblance of stability and not just speculation based on hype.

Thank you for reading.

Jay

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