Thanks to GameStop’s crazy volatilities and its ever-looming short squeeze, the meme stocks took over the mainstream media at the beginning of 2021. The unprecedented marker activity has not only formed a new category of stocks, but essentially a new investing strategy.
When trading meme stocks, the decision to buy or sell is no longer based on the company fundamentals, price movements or latest news, but it is based on the hype it is covered on social media. Retail investors rallied together on social media platforms like Stocktwits and Reddit to back some of the most shorted stocks by Wall Street short-sellers and trigger short squeezes.
Some of the common characteristics meme stocks are they’re usually overpriced and experience rapid growth in prices in short period of time. They are popular amongst millennials and Gen-Z, who like high volatility and pick stocks based on potential rather than financials. Fear of missing out or FOMO is the main motivator to buy when the price is up, while panic selling is common when the price is down, both add to the price volatility.
What you need to know about Meme stocks
When a stock has a lot of short interest either by retail investors or institutional funds, there is potential for a short squeeze. This happens when some sudden good news about the company or just strong momentum created by a group of investors to reverse the trend of the stock price. This will create a sudden spike of share prices which may push short sellers to close their position or cut their losses as much as possible, which pushes the stock price even higher and attracts more buyers.
Popular meme stocks
The list of most popular meme stocks changes all the time, as some of the original ones fade and others emerge. The only core stocks, also considered to be the source of the meme stock movement, seem to be AMC Entertainment (NYSE:AMC) & GameStop (NYSE:GME), Palantir (NYSE:PLTR) and Clover (NASDAQ: CLOV).
How to find the next meme stocks
There are a few patterns to look for when trying to find the next big meme stocks. Meme stocks commonly share the fact that they are heavily shorted by the hedge funds. These are the potential targets for retail investors to try to push into a short squeeze through buying campaigns.
Should you buy Meme stocks?
Most of the time, the price volatility of Meme stocks are driven by hype on social media which doesn’t mean the company fundamentals are affected. Investors buying into these stocks likely have to pay a premium, and they must be prepared for price volatility. The trick is being able to identify the difference between deserved hype driven by good fundamentals or growth prospects and hot air.