Fuelled by greed, or emotional triggers, or simply the fear of missing out, these sentiments are what contributed to the rise ofMeme stocks often gain cult-like popularity with some investors, who often focus on just one or two in the hope of making a fast fortune.Over the past 30-plus years, financial markets have become less informationally efficient in the relative pricing of common stocks. In fact, Clifford Asness, managing principal at AQR Capital Management in Greenwich, Conn.
But the bottom line is that it’s difficult to grow your money doing trading meme stocks. In fact, losses are much more common. Said one Reddit meme investor, “Some of these people will get rich quick, and I’m happy for them. I dipped my toes back into the blood infested waters of memes today, but then quickly remembered why I don’t anymore. Went from $500 to down almost in 15 minutes … escaped at a $1,250 lost and considered myself lucky.
Gill promoted the stock and built momentum as Roaring Kitty on YouTube and also weighed in on Reddit’s r/WallStreetBets forum. His analysis gained traction among investors as a huge number of short sellers decided to cut their losses and sell their money-losing shares. That was the case with home-goods retailer Bed Bath and Beyond Inc., which experienced huge volatility during a meme stock frenzy in 2022. The stock surged 314 per cent during the summer of 2022, quickly crashed back down, eventually leading to the company’s bankruptcy in 2023.
A case in point is Robinhood Financial, a popular trading app, which faced a major backlash and attention from regulators for restricting trading on certain meme stocks during highly volatile periods. Its penalty was US$70 million in regulatory fines in 2021, mainly for “widespread and significant harm,” to customers and misleading its customers, causing them to lose millions of dollars.
The biggest problem with meme stocks is the high likelihood that the stock tanks and investors lose the majority of their capital. From a small investor’s perspective, these losses will be more significant because the meme stock will likely be a larger position size compared to a larger investor who has more holdings.
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