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How Meme stocks changed investing
A meme is an idea, behaviour or style that spreads from person to person through imitation. Many people consider memes to be cultural versions of genes in that they spread from mind to mind, evolving and mutating as they go. Memes can range in scale from large religions to short-lived fashion trends or dance crazes. Their ability to spread and evolve has been boosted enormously by the rise of the Internet and social media, so it was perhaps inevitable that the concept would be applied to investing, giving rise to so-called meme stocks.
A meme stock is when a share gains fame of a viral nature through discussion-based communities and via social media. There will be a compelling idea or story as to why a share will rise in price, one that may not have much to do with those boring old fundamentals of current profit and the ability to grow that profit in the future.
It may simply be enough for the ‘buzz’ that builds up around a given stock, perhaps boosted by Twitter posts from high profile investors, to create enough interest in a meme stock to drive up its share price.
Or online communities may coordinate efforts to drive up share prices by initiating complex strategies that can see many small investors thwart the efforts of large institutional investors to drive down a target company’s share price.
The upshot is a meme stock will often rise in value to a degree that appears to be way out of touch with its fundamentals. And the ongoing interest from the community may see this overvaluation maintained for some time.
However, wait long enough and fundamentals have a habit of reasserting themselves, with many fingers getting burnt as share prices revert to their fair value.
Before that happens though there’s the excitement of being part of a movement, one perhaps that sees small investors take on big traditional investors such as hedge funds and beating them. Or there’s the simple thrill of picking a trend, an emerging meme stock, and following its ups and downs.
Many seasoned investors will look at meme stocks and be reminded of the dot-com boom and subsequent tech wreck of 1999-2000. Maybe things are different this time, but just in case they aren’t, don’t forget the basic rules of diversification and moderation. Do your research, and talk to your financial adviser before deciding if taking the plunge into meme investing is the right move for you.