The Impact of Meme Stocks on Investing

The Impact of Meme Stocks on Investing

Investing in companies that are popular on Reddit and other online forums became the new trend in early 2021, as investors sought to make money and beat hedge fund managers.

Investors were drawn to these stocks for a variety of reasons other than the online buzz. As a result of stimulus checks, market participants had extra money to invest in these stocks, and investors were familiar with well-known companies like GameStop Corp. (ticker: GME) and AMC Entertainment Holdings Inc. (AMC).

Internet and social media also played a significant role in bringing the meme movement to the retail audience and drawing attention to these speculative names.

Daniel Egan, director of behavioural finance at investing and saving app Betterment, says that social media has accelerated the accessibility and spread of (meme stocks) across geographic boundaries, especially among people who aren’t in finance and investing.

More inexperienced investors are now testing the market to see if they can profit quickly. There may be far-reaching consequences for investing as a whole if a new breed of investors emerges.

Having said that, what will be the long-term impact of meme stocks? Meme stocks changed the way investors interact with their investments because of the new perspective they provided:

  • What is a meme stock, exactly?
  • The trading rules are evolving.
  • “Short interest percent float” now exists.
  • Early risk-taking can lead to more successful investing.
  • A new approach to investing.

Table of Contents

What is a meme stock, exactly?

It’s a term coined to describe stocks that catch the attention of a younger generation of investors on social media sites like Reddit, and then go viral as a result.

As a result, the stock’s market value often differs from its intrinsic value. So, the stock’s intrinsic value, which is derived from earnings growth and valuation metrics like P/E ratios, earnings per share, and dividend yield, may not be as steady as the stock price suggests.

It’s not uncommon for the price of meme stocks to go up or down dramatically in a short period of time. Non-participation in the hype can also lead to FOMO, or fear of missing out, on potential stock market gains for certain investors.

Stocks like GameStop and AMC, popularised by memes, have sparked investor hysteria, causing market participants to make speculative trades on declining companies, driving their prices higher and altering their stock valuations significantly.

The Trading Rules are evolving.

It was clear from investing in or trading in meme stocks that the playing field is levelling off.

According to Allison Ostrander, director of risk tolerance at educational stock market platform Simpler Trading, traders typically target companies with a low market value and a favourable technical setup.

Retail investors poured into the market as a result of the meme stock craze, quickly becoming a formidable force. As a result of old-school investors’ failure to anticipate that retail traders would drive stock prices higher, hedge funds that were shorting the stocks were hit hard with losses and forced to close their short positions.

GameStop and AMC, two well-known memorabilia companies, did not see their shares rise in value because of the strength of their fundamentals. Participants in the market, on the other hand, were buying on the strength of the market. Ostrander claims that this set off a chain reaction among traders who saw this as an opportunity to profit from a brief upswing.

If you ask Ostrander, “(retail traders) might not have done the homework that hedge funds expect a trader to do.” According to her, new traders rarely inquire about the background of the company they’re considering investing in. They’re going to check out what’s available for a reasonable price, as well as familiar brands.

Short interest percent float” now exists.

Hedge funds have a history of shorting, or betting against, a cheap stock when the company’s fundamentals are weak.

Currently, hedge funds must consider “short interest percent float,” which is the percentage of shorted stock positions relative to the total number of tradable shares. In choosing which stocks to invest in, retail investors are now paying attention to this metric.

During the meme rally, a metric known as short interest percent float became popular among traders. Because there are not many shares left to short against, it could force hedge funds to get squeezed out of the market, which could lead to more volatile price movements in the long run, says Ostrander.

In January, GameStop’s short interest percentage float was around 100%, meaning that almost all of the shares investors owned were shorted.

This means that a meme stock trader may see an opportunity to profit from hedge funds piling into a company, forcing them out or getting them “squeezed out” of their positions when short interest percent float is this high.

Early risk-taking can lead to more successful investing.

As a result, speculative trades and excessive risk-taking may be used by Meme stock traders to enter the market Good news is that new investors usually pick things up pretty quickly. As soon as they have a good grasp of the market and its dynamics, they tend to invest in a wider range of sectors. Thus, as their investment knowledge expands, they can learn from their mistakes and make adjustments to their strategy as a result.

Social investing network Public CEO Stephen Sikes says: “The idea of people taking their first steps toward investing in speculative assets is not a new phenomenon. The majority of people begin their investment journey this way, according to him They can begin investing by picking stocks, but they can expand their horizons by diversifying.

New retail investors who bought meme stocks, according to a study by the public, have gone on to diversify their portfolios in greater numbers than those who did not.

It’s better to put that first dollar to work even if it’s not allocated optimally because it sets them on a path that eventually leads them to better investments and a long-term investing strategy, according to Sikes.

A new approach to investing.

Egan asserts that having multiple brokerage accounts is now the norm for investors. There are several brokerages where long-term investors can open an account with the goal of building a retirement investment portfolio. However, the same investor may also have a second brokerage account with a company like Robinhood, where they can trade and invest in riskier or more speculative securities.

Meme stock investing has attracted investors who aren’t afraid of taking on more risk, but experts say traditional investors haven’t necessarily shifted their approach from a long-term investing mindset to more speculative short-term trading. The answer is actually a hybrid of the two. According to Egan, the availability of various investment services has given investors the opportunity to experiment with different investment strategies.

There are many ways to interact with the markets, and most people are doing more than one of them, according to Egan.

Accessibility, or how convenient it is to invest in various ways, determines whether investors can participate in investments today. Because of the guidance and comfort provided by the services, investors will be more inclined to invest in certain securities if companies make it easier for them to do so.

According to Egan, as more services are developed, more people will use them to invest in a variety of different ways, simply to gain exposure to them.