If you thought the frenzy around GameStop and other so-called “meme stocks” was over after the rollercoaster ride of 2021, think again: GameStop’s stock (ticker GME) has surged over 500% in just the last month, fueled by a spike in trading volume. But as of this week, the so-called mania for “meme stocks” may already be waning.
This week’s rollercoaster is reminiscent of early 2021, when members of the Reddit investing community r/WallStreetBets rallied together to purchase GameStop and other struggling companies’ stocks, like AMC. Their goal? To squeeze out hedge funds and other institutional investors who had shorted those stocks, betting their prices would fall.
While GameStop was the leader, other meme stocks like AMC Entertainment and Bed Bath & Beyond have also seen big share price jumps in recent days, as the Reddit crowd appears to be reassembling their troops.
So what does this mean for everyday investors? A few key points:
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Meme stocks are extremely volatile and risky. The frenzy investing is based more on online sentiment than underlying company fundamentals. Prices can swing wildly in either direction.
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Don’t invest money you can’t afford to lose. Given the unpredictable and speculative nature of meme stock trading, investors need to have a high risk tolerance.
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Understand what you’re getting into. While the prospect of getting in early on a meme stock run-up is enticing, these are not normal market conditions. Like in 2021, manipulation by coordinated online investment groups is suspected.
While the current meme stock rally (and comedown) may be exciting to watch, for most investors, it will be better observed from the sidelines. Those who do jump in should do so with open eyes about the extraordinary risks involved. Catching the next meme stock wave could pay off, but trying to surf these volatile market manias is not for the faint of heart. You’re safer putting the money in an index fund.
