Understanding Meme Stocks – Proceed With Caution

My husband loves GameStop. We used to drop by every weekend to check out new games and see what the latest system looked like. And, I have to say, our Nintendo Switch was one of my favorite purchases – it has provided hours of entertainment and helps to break the ice with new friends.

But when I saw GameStop in news headlines as a major upsetter in the stock market, I was definitely confused. It’s not like GameStop is a major contender in the world of promising companies like Tesla and Amazon.

It’s not the first company you think of when you think of “successful stocks.” But the reason for its rising fame and interesting story lies within the world of “Meme Stocks”.

What are Meme Stocks

Back in January, GameStop’s stocks rose in value at an astronomical pace due to online forums like Reddit and Twitter. This online growth of a certain idea causing huge amounts of people to catch on and purchase a stock caused these stocks to be dubbed “Meme Stocks”. 

They aren’t tied to actual memes, but their success can be attributed to social media or online forums (like a viral meme).

Who knew there was such power in an online community? It seems like meme stocks really originate from the thought “what’s all the commotion about?” that runs through an investor’s head when investigating a successful stock. It’s like when there’s a gnarly accident on the freeway, and drivers slow to see what the holdup was.

We’re all curious people, and sometimes curiosity is all that’s needed to turn a mediocre stock into a Meme Stock. Let’s dive into some of the ins and outs of Meme stocks and decide for ourselves if it’s a bandwagon to jump on.

Short Selling

Short selling is a big part of the meme stock arena. Short selling includes several steps to hopefully ensure that you make money on your investments by selling them for more than you borrowed them for.

Here are three basic things to know when you’re learning about short selling:

1. It starts with borrowing some stock shares from a company of choice when they are doing well, and you think the stock is about to fall in value (say the stock is 50$ a share at this point).
2. Then, you’ll sell these shares while they are still doing well (the 50$ share).
3. Hopefully, the stock decreases in value. Now, you’ll buy back the shares at a lower price! (say they are now worth 40$ a share). Because of anticipating the fall in stock price, you profited! (10$ a share)

GameStop stock included a short selling scenario during its rise to a meme stock. So many investors had started short selling GameStop stock as it was rising because they assumed it would have to fall in value soon. Unfortunately, the stock kept on rising and many investors had to quickly sell the stock they had borrowed at a loss.

Ironically, this caused the stock to continue increasing in value due to more demand and resulted in a situation called a short squeeze.

Basically, this term is used when many short-sellers who at first thought they could make money on their borrowed stocks then decide they need to cut their losses all at once, causing the value of the stock to continue rising.

Short selling includes a lot of assumptions and risks, and it can be tricky to balance as a new investor.

Another example of a recent Meme Stock is Bed Bath and Beyond. I actually worked for a local BB&B as my first job in high school. They were doing exceedingly well as a company at the time (around 2012), but Covid changed all that.

Back in 2020, BB&Bs everywhere were having to close due to lagging revenue. So many brick and mortar shops had the same story, and most had to cut their losses and close down locations with high overhead costs.

This background story made it such a surprise a few months later when earlier this year, the stock value started rising and continued to rise over the summer.

Cue the confusion – has anything changed? Was the company changing itstheir course and on thetheir road to a more successful business model? No, that wasn’t the case. It seems that the company itself was even a bit blindsided by the stock growth due to internet forums and online traders – they even adjusted their forecasts due to this happy upset.

So, no huge changes had been made within the company itself to warrant this rise in stock value, but online traders had turned many investor’s eyes to BB&B.

Why the Excitement?

So, what’s the hype? Typically, the hype is just that – hype. The whole point of meme stocks is their popularity. So the excitement comes from online hype, and the hype continues as investors hop on board.

Meme stocks are kind of a newer type of investment category, and they came about when investing got “easier.” When investors started being able to quickly buy and trade with no commission fees on apps, it was easy to get many people to quickly buy or sell meme stocks.

The ease of buying and selling stocks definitely contributes to the pull for this type of stock.

Another exciting factor for meme stocks includes their volatility. This means that at the drop of the hat, they can rise or fall in value. They are known for quickly gaining traction, rising in value, and later losing hype and value. Why is volatility attractive? Well, if you’re looking for huge returns, you have to take huge risks.

The question is always – is the risk worth the possibility of losing it all?

So, are Meme Stocks Worth it?

As we explore the ins and outs of meme stocks, it can be easy to get excited seeing all of the possibilities for quick earnings and “underdog” stocks. However, if you’re new to investing or uncomfortable with high- risk investments, this is probably the wrong investment for you.

If you want to try your luck and invest small portions of disposable income at a time in these popular but volatile stocks, it can be an entertaining hobby.

But if you’re interested in investing your money in quality companies that show promise in the long run, you should do your research to find companies you mesh with, and options that would make you a more successful investor.

When considering investing in a company, I like to check out several factors to see if they could be the right choice:

• Do their environmental choices align with yours?

If you’re considerate of the environment and itsit’s future, and you’re passionate about companies that further their ‘green campaigns,’ check and see that companies you might invest in are doing the same. Some companies are more transparent than others when it comes to emissions, dangerous testing, and their footprint.

• Do their political choices align with yours?

This is something I think about often when investing in companies. By investing, I am essentially funding a portion of an organization. Do I want to fund a company that heavily supports agendas that I don’t love? Probably not.

• Are they using their resources wisely?

And lastly, you might want to check out the company’s financial situation, how they have been handling their debts (the company’s debt-to-equity ratio is a good place to start) and if they seem to be functioning at a healthy level.

Sometimes, this last question is not answered to my liking with meme stocks, since they are more of a fad and less of a true success story. If you check out a meme stock and don’t feel good about buying in, there are several ‘safer’ options for you to consider:

• Retirement Accounts

Retirement accounts aren’t a type of stock, but they can be compiled of safer more stable stocks if you so choose. You can check with your employer to see if they have a retirement program and an age-based allocation program where your money is placed in the safest funds for your age. Even if your employer doesn’t have one, or you’re self-employed, you can open one on your own.

• Bonds

Bonds are a portion of a loan, and you can be part of lending to a company in this way. Basically, you’ll loan money to the government or a corporation, and they’ll pay you with interest payments over the lifetime of the loan. If you choose a reputable company that’s likely to pay back their debts, bonds can be a super-safe option.

• Money Market Funds

Money market funds hold their value over time, and they are essentially investing in cash. They can be a great option to balance out your investing journey with a super safe option.

• ETFs

ETFs are known for having low fees since they’re not actively managed by a fund manager. They trade easily whenever you need to buy or sell, which makes them a safe option for their liquidity (or ability to turn into cash easily).

No matter if the stock you’re looking at is a meme stock or just a stock you came across, it’s important to do some research and find out if it is a trustworthy investment for you. The type of fund you invest in is also a huge factor, and maybe investing in a pre-chosen portfolio that someone else manages is more for you!

When my husband and I first heard about the chatter around GameStop, I thought about jumping on the bandwagon and investing quickly in this volatile stock.

However, I decided against it. Part of the investing process for me includes confidence in the direction of the companies I’m investing in, as well as an alignment of values they hold with my own. I didn’t have enough time to research and get onboard with Gamestop stocks.

Maybe the next time a company I’m confident in rises to meme stock fame I’ll jump on board!

You’ll have to decide for yourself if you think meme stocks are worth it for you, but personally, I’m taking it on a case by case basis.

Keep Reading:

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• How to Invest in Stocks For Long Term Wealth
• Things I Learned When I Started Investing Strategically