Maxim Manturov, Head of Investment Research at Freedom Finance Europe, explains what retail investors should know as the “meme stock” movement continues to thrive.
The key to success is to understand the motivations behind emotional investing and to avoid both euphoric and depressive investment traps that can lead to bad decisions. The investor psyche can overpower rational thinking during times of stress, whether the stress is caused by hype or panic. To capitalise on market euphoria or frightening events, it is critical to take a rational, realistic, and strategic approach to investing.
With this topic in mind, below I explore the rise of the “meme stocks” movement, and whether investors should look to capitalise on this growing trend or steer clear of impulse buys.
“Meme stocks” are stocks of companies that have recently seen a sudden surge in trading activity, usually supported by online social media platforms such as Reddit and Twitter. The hype surrounding a particular stock encourages retail traders to invest, knowing that its share price will likely rise and do so quickly. In addition, the “meme stocks” exchange community often favours stocks with high, short-term gains. By forcing everyone who sold the stock to cover their short position, this leads to further stock growth overall.
The term “meme stock” originated on the Reddit online discussion forum, where a sub-Reddit known as WallStreetBets became heavily popular. Towards the end of January, the users of WallStreetBets criticised large financial institutions and hedge funds for constantly 'shorting' the shares of distressed companies such as GameStop and AMC Entertainment. This led to retail traders buying large quantities of shares in these companies, taking advantage of the ‘buy and hold' approach.
Following this surge, news of the short squeeze spread across various social media platforms, attracting a lot of attention from investors across the globe, even to the point where the phenomenon came to the attention of the SEC. This resulted in certain hedge funds and brokers who worked with them making some pretty hefty losses.
It is important to remember that “meme stocks” are nothing more than speculation. Essentially, it is not worth allocating large sums to these trades, given the stock's volatile behaviour or unsubstantiated valuations backed only by information noise. In the long term, the company fundamentals will matter a lot, and after a short squeeze rally, the prices can easily go down as fast as they went up, so it is worth acting with caution and being aware of all the risks.
The movement of “meme stocks” has more to do with factors brought about by the pandemic. Historically low interest rates and incentives, as well as high levels of liquidity in the markets, combined with increased leisure time and self-isolation, provoked many people to enter the stock market for the first time. In addition, the increasing availability of zero commission accounts and trading apps for millennials contributed immensely to the growing trend.
Over one million new online brokerage accounts were opened in Q1 2020 alone, with equity trading becoming one of the most popular applications for Covid's incentive cheques in the US. Yet, the retail investment boom is not unique to the US. Almost all major stock markets have seen similar trends, with local trading applications becoming more widespread.
The future of the “meme stocks” movement will depend on the fundamental reasons for its emergence in the first place, including liquidity levels in the markets, interest rates, and monetary policy. Without these components, the rise of “meme stocks” might have never happened in the first place. As such, while it is likely that this theme will continue to exist, it will not move at such an incredible scale as in January with Gamestop and AMC stocks.
While it is clear that investors should avoid impulse buys, with the right level of research and precaution “meme stocks” can result in profits for more experienced buyers. So, what are the top “meme stocks” that investors should watch in 2021?
GameStop jumped by as much as 36.5% to $225 apiece in heavy trading volume. According to FactSet, over 14 million shares changed hands, a figure that is seven times more than its 30-day average.
Shares of AMC Entertainment were also up. The US cinema chain saw a 20.3% increase and, according to the broker’s website, was the most active stock on Fidelity’s trading platform as of 2:30pm ET. Domestic merchandise retailer Bed Bath & Beyond rose by 4%, whilst Clover Health jumped almost 10%. Robinhood advanced 9% without any apparent news.
However, with most investors awaiting Thursday and Friday’s key Federal Reserve summit, the rest of the stock market appeared subdued. The S&P 500 closed Tuesday’s session 0.2% higher.
According to FactSet, overall volume was light on Tuesday with the SPDR S&P ETF trading 30 million shares.