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Why investors consider meme stocks
There may be a few reasons why investors have jumped onto the meme stock craze. The first is that many hope to make a large amount of money in a short period of time.
The other reason why people buy in can simply be: It’s fun to join the crowd. Similar to jumping on a bandwagon when a sports team makes it to the finals — many people enjoy taking part in the excitement. In the case of meme stocks there may be no better bandwagon than joining the social media masses. Ultimately, there may be nothing wrong with having a little fun if you have the extra money to spend. Using retirement or money allocated for reasons other than investing to play the meme, however, could be more dangerous.
What are some risks associated with meme stocks?
The biggest risk with a meme stock is losing all of your money. Without solid fundamentals to back up the price increase — such as increasing revenues or profit growth — sustaining excitement for a company can be difficult after the initial wave of exuberance subsides. Stock prices of meme stocks tend to plummet as soon as sentiment turns.
Because price gains are driven by what the masses think and not by fundamentals or core value meme stocks have shown to be highly volatile. After their initial run-up in price, some return to the levels they traded at before they went viral. Others continue to fluctuate in a range between their peak and previous levels. Retail investors who bought meme stocks on their way up may have been left with shares that now trade below the price they were purchased at.
Key factors to consider before investing in meme stocks
Before buying into a meme stock, it can be important to review the company’s fundamentals and make a case for investing. Just like you wouldn't buy a company simply because a colleague told you they have a hot stock tip, you may not want to follow the crowd into a business that could go bust. Look at annual and quarterly reports to see whether the company is growing. Are revenues rising? Is the company increasing earnings year after year? Does it have a product lineup that makes sense to you? Research other fundamentals to see how the meme stock may add value to your portfolio. Analyst reports often list price targets — take a look at those to see what pricing level the professionals recommend. If you want to jump in, it may be a good idea consider if the price is sustainable.