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In a world that seems to get more and more complex by the minute, it's nice to be able to rely on something you can count on. And in the meme market, you can always count on Reddit. The popular social sharing site Reddit has become a hub for stock traders and meme traders to get the latest news on their favorite meme stocks. In addition, its many subreddits are one of the most active communities online for people looking to share memes and learn about new ones.

The Reddit community is known to be one of the most influential communities in the world. Users can post memes or any possible idea or suggestion on this forum and discuss it. The vibrant discussion environment makes this place full of opportunities for traders who know how to take advantage of it.

What are Meme Stocks?

Meme culture has become mainstream. As the ubiquity of social media has grown, so has the prevalence of memes. As a result, memes became an integral part of modern life.

Meme stocks have also become a part of the investing lexicon in recent years. The hype has even caused significant shifts in valuations. Just look at how powerful both Reddit and Twitter were in 2021.

A meme stock is not exactly a growth or value stock. Instead, it would be inappropriate to classify it as such. Although we will not find meme stocks in textbooks anytime soon, it would be a mistake to overlook their impact. Some of the common characteristics of meme stocks are they tend to be overpriced and have rapid spikes in short bursts of time.

Popular amongst Gen-Z and the millennials, these stocks are prone to high volatility due to their perceived potential. Or when it comes to the GameStop situation, not even potential but exploiting the system. Usually, the sentiment around a stock focuses on the future problem it resolves.

Looking at the charts of cannabis stocks like Canopy Growth and Tilray shows that investors are heavily hyping these companies. But, unfortunately, with meme stocks, it is common for the hype to take over logic.

How did meme stocks start?

We can trace the rise of the meme stock back to two main factors: the existence of online investing communities and commission-free trading. Commission-free trading has been widely welcomed by the public, allowing individuals to trade stocks and commodities without having to spend a dime. This way of trading is beneficial for both the individual investor and the market. Companies like Charles Schwab, TD Ameritrade, and Robinhood helped make commission-free trading happen.

Online investing communities such as Reddit and Stocktwits have become essential components of the stock meme. Stocktwits is a social media site that focuses on stocks. It has millions of members and is growing daily. These members, along with members claiming to be Wall Street bets, hold significant weight in shaping market sentiment.

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The people behind the memes

Meme stocks are the result of the rise of retail investors. Retail investors are individual amateurs who are becoming more influential in the stock market. Unlike institutional investors, retail investors have more freedom in how they invest their money.

While most traders agree that they want to increase the value of their assets, some individual traders see themselves as financial vigilantes. The investors causing the meme stock frenzy are out to fight the one percent.

Many retail investors started trading in 2020 due to the global pandemic that kept people at home. Stimulus payments provided them with immediate cash flow, and commission-free digital platforms such as eToro and Robinhood allowed them to trade at any level. In January 2021, the most prominent retailers e-broker platforms reported 8.1 million daily trades on average. This amount was up from the record of 6.6 million average daily trades in December 2020

Over 100 million people use the top six online brokerages for retail investors. While this massive user base is diverse, one key characteristic these investors have is that they are young.

Finding Meme Stocks On Reddit!

Matthew Tuttle, the head of Tuttle Capital Management, said that it wasn't hard to identify potential meme stocks. He explained that the fund he launched called the FOMO ETF was designed to take advantage of the meme stocks' hype.

Retail investors who use commission-free online trading platforms like Robinhood should look for companies with large short interest from institutional investors. The tricky part is timing. The reason for this is that for a meme stock to succeed, it needs the support of the Reddit community. On the other hand, investing in a company that Wall Street says is a good short sell will probably not make you rich any time soon.

There are risks with buying the stock too early as it might not ever get picked up by Reddit hype. However, buying too late could make you miss the hype, and the stock can return to its pre-frenzy price.

There are many different ways to find stocks for your next trade. Contrary to popular belief, meme stocks do not have fundamentals. Instead, they are focused on riding the wave of momentum and have near-perfect timing for entry and exit. Most of the time, buying into meme stocks can be challenging due to the volatility involved. Most of the buy-ins occur with daily changes of -5% or +5%. However, if you are confident in your pick, buying meme stocks at relatively high prices should not be a concern.

On the other hand, investors should generally find it risky to enter if the stock has moved more than 25% from its normal price.

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Why Are Meme Stocks So Popular?
What are the risks of investing in Meme Stocks?

Previously ignored stocks like GameStop and AMC Entertainment have gained this year. Viral memes and short squeezes are becoming the new strategies used by traders to pump up stocks and attract new investors on social media platforms like Reddit.

In 2021, GameStop stock went up by 4000%, while AMC shares increased 2500%. Cryptocurrency Dogecoin has also joined the meme party, with gains of over 12,000%.

On the one hand, the meme stock boom has raised concerns that the market is entering a bubble. While on the other hand, It could also signal fundamental changes in how the market works.

Even though many people have seen eye-popping gains from investing in meme stocks, there are some reasons to avoid investing in them.

Here are some of the reasons not to invest in meme stocks:

1. Not knowing when to sell

Deciding when to sell a stock is difficult enough. It's almost impossible to time the market and assess a stock's valuation based on other factors like growth prospects and broader market conditions. With meme stocks, it is even more challenging. Fundamental factors that apply to other stocks do not apply to them. Hence, it is difficult for investors to determine when to sell. Likewise, essential factors that apply to other stocks do not apply to them.

A buy-and-hold strategy is not likely to work with these stocks either, as they can quickly lose steam once the parabolic gains begin to disappear. For example, in January 2021, GameStop (GME) shares soared to almost $500 a share before suddenly dropping 90% in a couple of weeks. The stock's trajectory shows just how quickly meme stocks can turn.

2. Losing money

Most stocks trade at prices that are based on a fair evaluation of the company's value. A stock's price is determined by an intrinsic value, which is the sum of its various components, such as assets and profits. Unlike stocks, meme stocks are more like lottery tickets. They can rise and fall depending on the news cycle and the momentum of the market.

These stocks have already been trading at high multiples. Therefore, buying meme stocks could result in losing all of your invested money.

For example, GameStop's peak price was on January 28, 2019, and it has fallen by 90% in less than two weeks. Likewise, Dogecoin peaked at $0.74 before Elon Musk's performance on Saturday Night Live and has since fallen by over 70%.

Other stocks have also flown too close to the sun. For instance, Koss, which hit a high of around 85% in January 2021, crashed after reaching its peak. Of course, there's a lot of risk in owning stocks, but most tickers will not lose half their value in a few weeks. Meaning, the average stock is more stable than the meme stock.

3. Meme stocks are overpriced

A stock is not a bet. It's an ownership position in a business. Therefore, the stock price should represent the company's performance over time.

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Where Did the Term "Meme Stock" Come From?

The term meme stock started to circulate online after retail traders on a subreddit called WallStreetBets teamed up to wage war with hedge funds who were shorting GameStop. Before the social-based action started, GameStop was trending downward. It was because the Covid19 pandemic hit the company hard. Covid forced GameStop to close many stores and significantly lower its revenue and earnings.

Short selling is a strategy institutional investors use to profit from a decline in a stock's price. They borrow shares from investors and sell them at a lower price in hopes of repurchasing them at a later date. Many retail investors didn't like the idea that large-scale investors were borrowing their shares and driving down the prices. So WallStreetBets has launched a campaign urging people to buy stocks and stop selling them to hedge funds and other institutions driving down the prices.

According to CNBC, in January 2021, the funds that were shorting the stock had lost almost $20 billion. The event was dubbed The Big Short Squeeze.

Why did they lose so much money?

When you borrow shares to short a stock, you borrow them to sell them at the current price. However, you must return these shares. When a stock rises from its price when it is sold short, the investor loses money. That happens because they have to buy back their borrowed shares at a higher price. Sometimes, when the price of a stock rises, short-sellers may buy back their shares before they get too pricy witch cuts their losses but pushes the price even higher. This instance is known as a short squeeze.

As the retail investors took the lead, memes about the event started appearing on social media. That is when the term meme stock came to life.

How to invest in meme stocks?

A meme stock is a type of stock that has generated hype online. Usually, it's a stock that has fallen out of favor with Wall Street.

Before investing in meme stocks, make sure that you have a solid investment thesis. For instance, if you believe that movie theater attendance will increase after COV-19, you might assume that AMC will return profitable. Or maybe you think that Beyond Meat can capitalize on the growing demand for clean meat.

You should have a solid reason to invest in a meme stock, aside from the hype.

Meme stocks are volatile, which adds to the arguments for having an emergency fund that's big enough to cover your expenses for at least six months. A cash cushion is a cushion that you can use to protect yourself from having to sell shares if you suddenly encounter a significant expense or loss. Also, if you're not already contributing to a retirement account, avoid meme stocks. They're more of a speculation than an investment.

However, it doesn't mean that you should completely ignore all forms of speculative assets. A 5% to 10% limit on risky assets is a good rule of thumb to follow.

The department of revenue

The most significant risk in investing in meme stocks is that you can lose all of your money. But, there's also a chance that you'll make huge profits. In this case, the department of revenue would demand a cut. Meme stocks are attractive to traders due to the potential for astronomical short-term returns, but they are also subject to taxation when they are earned.

When you sell a stock you've held for at least a year and a day, you're selling a long-term capital gain, and lower tax rates apply.

There's nothing wrong with investing in meme stocks if you can afford to lose. However, it's important to remember that these are investments that can be easily beaten. Meme stocks are incredibly volatile and can turn wildly unpredictable. Don't put your money at risk by investing in them if you don't have a safety net.

Most famous meme stocks

Here is a list of companies whose stocks turned into memes.

Gamestop GME

GameStop is a video game retailer that sells video game consoles, video game accessories, and other gaming merchandise. As of January 30, 2021, GameStop operated 4,816 stores in the US, Canada, Australia, and New Zealand. Formerly called Babbage's, the company was founded in Dallas in 1984 as a video game retailer. It became known as GameStop in 1999. During the mid-late 2010s, it started losing money due to the decline in its video game sales.

In 2021, GameStop's stock price went up after users of an Internet forum known as r/wallstreetbets orchestrated a short squeeze. During January and February 2021, GameStop received significant media attention due to its short squeeze and volatility.

GameStop also owns and operates Game Informer, an online video game magazine, and Zing Marketplace, an e-commerce marketplace for retro gaming.

A GameStop short squeeze

In January 2021, a short squeeze caused the share price of GameStop to increase by 1,500%. As a result, it reached an all-time high of US$483.00 on the New York Stock Exchange. This effect was mainly due to the efforts of a Reddit community known as r/wallstreetbets. A spike in the stock price occurred after Elon Musk tweeted about "Gamestonk!" and linked to the community. Afterward, GameStop found itself on the list of most popular meme stocks.

Matt Levine compared this situation to the "short squeeze" of 2012. In February 2021, GameStop stated that its finance chief Jim Bell would leave the company. According to the company, it did not have any issues with Bell regarding his work. In April 2021, George Sherman announced he would step down as the CEO of GameStop. That same month, the company stated that Ryan Cohen, a shareholder of GameStop, would become the chairman of the company's board of directors. Mike Recupero and Matt Furlong were named GameStop's new CFO and CEO, respectively, on June 9, 2021.

NFT Platform

In May 2021, GameStop announced that it is developing a non-fungible token that uses blockchain technology. According to Business Insider, GameStop's attempt to build an NFT platform are a part of the company's plan to become the Amazon of gaming.

AMC Entertainment

AMC Entertainment Holdings, Inc. is the world's largest movie theater chain. The company headquarters is in Leawood, Kansas. In addition, AMC also has the largest share of the USA's theater market. It has over 7,967 screens in the US and 2,866 in Europe.

From 2012 to 2018, its majority owner was the Wanda Group, a Chinese conglomerate. The company has a listing on the New York Stock Exchange. Silver Lake Partners invested in AMC in 2018, but the Wanda Group still holds the company's voting rights. In January 2021, the financial difficulties caused by the COVID-19 pandemic led to the decline of Wanda's ownership. The decline was mainly due to the emergence of new financing by AMC and Silver Lake. In addition, in February 2021, Wanda Group converted its Class B shares to Class A shares. This reduced Wanda's voting power.

In January 2021, AMC Entertainment Group announced that it had raised $937 million in new funding. That same month, the company stated that it had committed to raising $411 million in new debt financing. The company noted that this new funding would allow them to make it through the Covid-impacted winter season.

AMC Short squeeze

As part of a series of short squeezes initiated by Reddit users, AMC's share price gained a significant 300% spike a day following this announcement. The increase impacted the bonds of Silver Lake. Silver Lake Partners agreed to convert $600 million of its debt into equity at $13.51 per share. As a result, Mudrick Capital Management made almost $200 million in profit.

On February 5, 2021, a subsidiary of Wanda Group filed with the Securities and Exchange Commission to convert its Class B common stock into Class A shares. Thus, while Wanda remained the most significant single holder of AMC, the conversion and financing efforts of the company effectively surrendered its majority control.

A look into the future

During its fourth-quarter earnings call, the company noted that its revenue had dropped year-over-year by over 88%. Adam Aron, the AMC CEO, said that the company was facing the most challenging market conditions in its 100-year history. However, he cited Covid19 vaccinations are a sign that cinemas will open and is hopeful more blockbuster movies are in the pipeline.

In addition, he confirmed Wanda no longer has majority control, and the company will be governed like most other publicly-traded companies.

In June 2021, multiple investors poured into AMC stock, pushing it to an all-time high. Its price has since consolidated in the 35 to 55 dollar range. One of the prominent companies to take a stake in AMC was also the Swiss bank.

Adam Aron, the CEO of AMC, went on to announce that the company would start accepting Bitcoin, Ethereum, Bitcoin Cash, Dogecoin, and Litecoin. Naturally, Crypto supporters like Elon Musk took an interest in this statement. In addition, music concerts, NFL games, and even UFC fights are now part of the AMC platform. As of September 2021, the company has been having discussions with GameStop.

As of September 23, AMC has a high short interest of around 21%.

Blackberry

BlackBerry Limited is a Canadian-based security company that provides end-to-end protection, enterprise security solutions that help organizations secure the Internet of things, and critical event management solutions for enterprises.

This business was initially known as Research In Motion. First, the company used the BlackBerry brand to produce tablets, smartphones, and interactive pagers. Then, it became a cybersecurity company under the leadership of John Chen.

Now, various industries use the company's products to prevent hackers and ransomware attacks.

BlackBerry was founded in 1984 by Mike Lazaridis and Douglas Fregin. In 1992, Jim Balsillie became a co-CEO to Lazaridis, and in 2012, Thorsten Heins became the president and CEO.

John S. Chen took over as the CEO in November 2013. His initial strategy was to focus on software technology. He has been working on a system that involves licensing agreements with device manufacturers. This strategy would help monetize the company's software portfolio. In 2020, OnwardMobility and BlackBerry signed a licensing agreement. The company will be releasing a new 5G smartphone in 2021.

June 2021 Reddit frenzy

In June 2021, there were a lot of posts dedicated to Blackberry on Reddit. Reddit's top 20 posts were all about the company. Wall Street Bets bulls said that Blackberry had become a security firm that could be well-placed to enter the electric vehicle market.

Nokia

Nokia is a Finnish multinational information technology, telecommunications, and consumer electronics company founded in 1865. Even though the main headquarters is in a greater Helsinki area in Finland, this organization's roots are in the Tampere area in the Pirkanmaa region.

Nokia is a publicly-traded company listed on the New York Stock Exchange and the Helsinki Stock Exchange. It is the 415th largest company in the world by 2016 revenues. In 2020, they employed over 92,000 people globally and had annual revenues of around 23 billion.

The company has been operating in various industries for over 150 years. It used to be a pulp mill and was associated with rubber and cables. Since the 1990s, the focus has been on large-scale telecommunication infrastructure and technology development.

Nokia accomplishments

Nokia has made significant contributions in developing various mobile telephony standards, such as GSM, 3G, and LTE. In 1998, Nokia became the world's largest vendor of mobile phones. However, in the later 2000s, Nokia suffered from a series Of poor management decisions, which led to its share of the mobile phone industry dropping sharply.

In 2014, Microsoft purchased Nokia's mobile phone business. Microsoft Mobile became its successor in the same year. Following the sale, Nokia started focusing on its core businesses and Internet of things technology. The company also dived into virtual reality and digital health through the acquisition of Withings. Nokia then returned to the mobile market in 2016.

Nokia is a leading patent licensor for mobile phone manufacturers. As of 2018, it is the third-largest mobile network equipment manufacturer in the world. The company was seen as a national pride by the Finns as its mobile phone division became the biggest brand in Finland. In 2000 during its peak, Nokia accounted for 4% of the nation's gross domestic product, 21% of its total exports, and 70% of its stock market value.

Nokia is considered one of the top meme stocks and was endorsed by the retail investors on Reddit.

Palantir

Palantir is a company that specializes in Big Data analytics. Peter Thiel, Joe Lonsdale, Alex Karp, Nathan Gettings, and Stephen Cohen founded the company in 2003. The company has a headquarter in Denver, Colorado.

The founders took the name "Palantir" from the Lord of the Rings. Palantir is a company that specializes in the development of technologies related to counter-terrorism. Some of its products include the Palantir Gotham, the Palantir Metropolis, and the Palantir Foundry. In the past, investigators from the US Recovery Accountability & Transparency Board used it.

In addition, cyber experts at a Canadian venture capital firm known as Information Warfare Monitor also used Gotham. While financial firms, banks, and hedge funds use Palantir Metropolis. Corporate clients are the ones that use Palantir Foundry.

The original intention of Palantir's establishment was to serve the USIC's federal agencies. However, it has since expanded its operations to include state and local governments and private companies in the healthcare and financial industry.

Palantir stock is one of the favorites on the Reddit forum and is regarded as one of the meme stocks.

To Wrap Things Up

There is money to be made by investing in meme stocks, but this strategy requires skill and time. These stocks are very volatile and can give you an exponential return on investment if you invest in them at the right time. Suppose you are interested in learning more about the best meme stocks to invest in. In that case, it is advisable to start small and gain some experience trading before making any significant investments.

We encourage you to be aware of our disclaimer policy.

This article was last updated on December 8th, 2021.

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Source: https://allmarkets.io/investing-in-meme-stocks-ultimate-guide-for-reddit-traders/

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