Meme stocks such as GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) gained as much as 300 per cent since Friday after Keith Gill, aka Roaring Kitty, the original spark behind the meme stock craze in 2021, made his return to X with an ongoing series of cryptic posts.
The first, depicting a man leaning forward in his chair, a popular gaming meme signifying that game-play has taken a serious turn, contributed to a significant spike in trading for these two stocks, making them the most traded by retail investors on Monday, according to J.P. Morgan. Other stocks also found themselves caught up in the buying frenzy, posting massive returns since Friday, including:
- SunPower (NASDAQ:SPWR), a solar technology and services company, up by almost 100 per cent.
- Koss (NASDAQ:KOSS), a headphones manufacturer, up by 94 per cent.
- Tupperware Brands (NYSE:TUP), a storage container provider, up by 63 per cent.
- BlackBerry (TSX:BB), the cybersecurity company and fallen smartphone giant, up by as much as 32 per cent.
- Reddit (NYSE:RDDT), the social media network where the meme stock movement began, up by 16.5 per cent.
These stocks have little in common other than their meme stock moniker, which refers to retail investors’ affinity for them, attracting enough support, mostly through social media, to be able to increase share prices.
The meme stock phenomenon dates back to 2021, when pandemic lockdowns, stimulus cheques and the proliferation of zero-fee trading led millions to take up stock trading to pass the time, and the more passionate among them to share their investment opinions across the internet. Gill quickly rose to prominence thanks to his YouTube diatribes and bluntly worded posts on Reddit’s WallStreetBets forum about GameStop stock, helping it to soar by more than 1,700 per cent in January 2021. Congress summoned him for questioning the next month, where he professed his love for the stock and denied any wrongdoing.
What you should know before investing in meme stocks
While the current meme stock rally seems far from over, interested investors should be cautious about putting money behind the largely sentiment-based event, which has a history of turning multi-bagger returns into steep losses over short periods of time. Here are four key recommendations before hitting the buy button:
- Determine if your portfolio has room for speculative investments, such as meme stocks, where the investment thesis is based on sentiment instead of recognized green flags for future value creation like profit and pricing power. Ideally, speculative investments should be made with capital left over after accounting for your basic needs, emergencies and savings goals, since the risk of significant loss is an ever-present reality. One wrong comment from Roaring Kitty could send GameStop on a downward spiral.
- If you do decide to invest, establish a range of returns you’d be happy to exit within, as well as a maximum allowable loss, for every stock you take a position in, so you aren’t left paralyzed by volatility, incapable of making a rational decision.
- Diversify, because although meme stocks move in lockstep, the catalysts that send them skyrocketing are usually about only one or a handful, granting these chosen few an added bump in returns.
- Hold your meme stocks in a taxable account, which enables you to use capital losses to offset capital gains in other investments.
Technical considerations aside, and perhaps most important of all, taking a flyer on a stock that feels worth the gamble, unless you bet the house on it, is at best a thrill-seeking activity, where your gains will probably buy you a nice dinner, or a decent used car, as opposed to leading you to financial independence overnight. So, please allocate according to the risk you’re willing to take, and keep the dollar amount well below what would prevent you from sleeping well at night.
Join the discussion: Find out what everybody’s saying about meme stocks on the GameStop Corp. and AMC Entertainment Holdings Inc. Bullboards, and check out the rest of Stockhouse’s stock forums and message boards.
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