Safety Tips: Before investing in meme stocks
March 11, 2021
You may have heard or read about a few companies that were discussed heavily on social media and Reddit, surging in value seemingly overnight. These are referred to as “meme stocks” in the news and online. These companies are a select but growing assortment whose significant growth in price is powered by the excitement and hype generated on social media forums like Reddit. It may not always be accurately reflecting the underlying fundamentals. The promise of large returns may sound exciting, there are a few things you should consider before investing your hard-earned money.
- FOMO (Fear of Missing Out) can lead you to risk far more than you are comfortable with. The fear of missing out is a challenging barrier, especially when investment opportunities are championed on social media by many people. While some investors have made money on meme stocks, many others lost substantial amounts due to the volatile spikes and dips in their values.
- Investing in social hype instead of fundamentals can expose you to fraud. Investing in stocks can be a powerful tool to grow your wealth. It requires you to do a lot of research into the company and the products and services it offers. It also requires you to look into the leadership and industry it competes in. Doing your due diligence enables you to decide whether the company is legitimate and suitable for you and your risk tolerance.
- Online forums for investors to meet up and discuss investment opportunities have led to a blend of speculation, hype and inaccurate analysis. Online forums and social media can quickly cause hype with no fundamental business reasoning. It can result in large swings of the stock’s price, making it virtually impossible to make sense of the stock’s real value.
- Investing in meme stock can derail your investment objectives and financial plan. Meme stocks are a relatively new phenomenon that can quickly derail your financial plans. The speculative nature of these investments and the hype that social media brings to them does not guarantee wealth. If you plan to incorporate meme stocks into your financial plan, seriously consider if you can absorb a loss of some or all of your investment.
Developing a financial plan and objectives for your investments is an important first step for any investor. By considering your age, life goals, time horizon, and level of risk tolerance, you can develop a meaningful plan of action that may combine various securities like exchange-traded funds, mutual funds, and stocks to meet your goals. While helping you achieve your goals, a financial plan also helps you evaluate any new investment opportunity against those goals.
The foundation for long-term investing success relies on the core concepts of diversifying your investments, maximizing the power of compounding interest and always sticking to the right level of risk for you. With the rising popularity of meme stocks, it may sound like an appealing way to start investing or a relevant strategy to integrate into your financial plan, but it could end up doing far more harm to you than good.
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