The signals that sent stocks flying during the first half of 2021 won’t be the same ones that precede the next viral stock surge. Here are 2 schools of thought on identifying the next parabolic meme stock. The answer is tough because the environment that made meme stocks viable no longer exists. Stocks have gone parabolic since the beginning of public markets, but meme stocks existed during a very unique time. GameStop Corp going parabolic required a confluence of events that will be hard to replicate. In this article, we will review six stocks that could be the next big meme stocks leading the resurgence of the meme stock craze.
Fidelity Investments
NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. It’s vital to control your emotions should you take a position in a social media meme stock. Remember, they are best for trading as underlying fundamentals tend to be weak, which causes bears to short the stock, resulting in high short interest. The more irrational it is, the more likely short-sellers get involved and the more potential it has to short squeeze. Options trading entails significant risk and is not appropriate for all customers.
OG Meme Stocks Still Below 2021 Highs
However, meme stocks are generally unpredictable, are not appropriate for many investors, and their price movements are often disconnected from the company’s financial health. Investors may face steep losses when momentum fades or short squeezes unwind. In summary, people base their investment decisions on various factors, including what they believe the future value of a company will be. Meme stocks are a relatively new concept and are popular with younger investors. Demand for meme stocks seems to be driven in part by factors beyond new information about a company’s performance or general market conditions, such as social media interest in the stock. Social media provided a platform for investors to discuss their investments, and more people have been able to invest due to the introduction of low-fee and no-fee mobile trading apps and other financial technology innovations.
Indeed, as these became recognized meme stocks, members of r/wallstreetbets and similar outlets began to acknowledge the humor (for the “lulz”) of design your forex trading system in 6 steps seeing such legacy companies emerge from the ashes in the stock market. The renewed meme stock rally also extended to other companies, such as AMC Entertainment, which saw its stock price jump 120% in early trading on Tuesday. AMC took advantage of the heightened interest by raising approximately $250 million through a share sale. The main victims of the squeeze ended up being a handful of hedge funds, some of which were forced to shut down due to heavy losses. As a result, the meme stock concept adopted a David vs. Goliath or Robin Hood connotation of taking from the rich Wall Street elite and rewarding the small retail investor. Many retailer investors became interested in Nokia because of the high number of its shares that were being sold short by institutional investors and hedge funds.
- Even with meme stocks, the old adage, «Don’t put all your eggs in one basket,» still rings true.
- The company claims that deriving a credit score is more accurate, reduces lenders’ default risk, and provides borrowers with faster and more personalized loans.
- Investors may face steep losses when momentum fades or short squeezes unwind.
- Even after the meme stock surge and bust, speculators are always searching for the next meme stock.
- For retail investors trading on margin, this volatility can trigger margin calls — a demand from their broker to deposit additional funds to maintain their position.
Who Demands Meme Stocks?
If you were an active trader during the early months of 2021, you could watch the meme stock rally unfold in real time. Investors and institutions will study the events of that time for decades as immense fortunes were made (and lost) in just a few weeks. While meme stocks are fizzling out today, it’s important to understand how the craze came about and whether these companies are still worthy of our capital in the present day. Ultimately, a short seller may run out of available funds to hold on to the short and will be forced to buy back the shares at a higher price and close out the position. If many shorts are forced to cover at once, it adds additional upward pressure on the stock’s price as they are all forced to buy the stock and cover at ever higher prices. This is known as a short squeeze, and it accelerates a stock’s price increases as more and more short sellers are forced to bail out to cut their losses.
Figure 1 above shows the closing prices of GameStop shares throughout January 2021. Why did GameStop’s stock price change so much over such a short time period? While a complete answer to this question is very complex and outside the scope of this discussion, the article will summarize common reasons why the price of a stock changes and how a meme stock seems to differ. The viral meme stock trend of 2021 will undoubtedly be studied in business and economics courses for years. Today, meme stocks have become a the business case for rfp software form of high-risk gambling for traders seeking a thrill, but the likelihood of experiencing the explosive gains of the past is slim. GameStop was the original meme stock, garnering significant attention on the WallStreetBets Reddit board.
However, this process can also lead to equally dramatic losses for retail investors if prices drop just as quickly. For retail investors trading on margin, this volatility can trigger margin calls — a demand from their broker to deposit additional funds to maintain their position. If investors are unable to meet the margin call, their broker may liquidate assets to cover the shortfall, potentially locking in significant losses. This adds another layer of risk, as dramatic price volatility can leave investors on both sides exposed to financial losses and forced liquidations.
A meme stock’s value is a Technical analysis tools result of its hype on social media and not necessarily the company’s performance. Though there is a potential for monumental gains, meme investors are more likely to experience potentially bigger losses as the stocks become overvalued and their price dramatically plummets. Conventional wisdom says a stock should eventually settle at a price that reflects how much cash the company is generating, where interest rates are heading and other factors.
In most cases, these viral stock trending instances stay confined to certain sections of social media, like finance people on Twitter or the WallStreetBets group on Reddit. Occasionally, a person with a large following can induce a viral craze that results in millions of dollars of altered market cap. As the price of the shorted stock rises, the short seller will begin to experience losses. These losses must be covered in a timely fashion, often prompted via margin calls, whereby the broker demands funds to make up for those paper losses. While GameStop was the first successful meme stock, it was not the only one.