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Meme Stocks: Should You Be Careful Investing Them in 2022?

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Social media is not only an avenue for social interaction. In recent times, people have been using social media to find investing opportunities. They may gather around and make concerted actions that could drive prices of lesser-known assets higher. Such is the case with the meme stock craze in 2021. Just because these stocks take off, are they already suitable investments?

In a survey conducted lately by fool.com among more than 1,500 investors in America, they found out that less experienced investors had joined the craze. However, investors with more than ten years of market experience steered clear of meme stocks.

While buying meme stocks during the frenzy has the potential to turn in quick profits, investing blindly can have drastic results. You might be buying when the other investors are liquidating their positions. Before you invest in meme stocks, make sure you do your research and put money in assets with value.

In this article, we will discuss three meme stocks you can consider buying in 2022. Before that, let us review what a meme stock is and learn some tips on buying one.

What is a meme stock?

A meme stock is a small group of stocks that suddenly become popular and grow in value due to hype and simultaneous buying by many individual investors. See some meme stocks in the image below. While you can make quick bucks purchasing meme stocks, this type of investment carries many risks. If you invest at the wrong time, you could lose big time. This is because investors who push these stocks higher are not interested in holding their positions for long.

The price appreciation of a meme stock is usually caused by social media hype, not the stock’s performance. It is natural for the price of an asset to go up if many people are buying it. Because usually meme stocks are relatively cheaper than mainstream stocks, you can make a lot of money if meme stocks suddenly encounter a dramatic price growth. However, when the price increase is abrupt, stocks could get overvalued and collapse just as rapidly.

Sample meme stocks

Sample meme stocks

Tips on buying meme stocks

Since meme stock investing is risky, some things must be in place before you engage. Here are some tips to guide you:

  • Allocate only a small portion of your overall investment capital in meme stocks.
  • Make sure you have already built from three to six months of an emergency fund.
  • See that you have paid high-interest debts in full first, such as credit card.
  • Never touch any amount set aside for your retirement plan. A retirement package is your ticket to enjoying life in your retirement years. Keep it going.

When you are ready to start your meme stock investing, you have to connect to a brokerage firm. Two popular brokers are Webull and Robinhood. They provide mobile applications to support active investing. Webull allows you to manage both your stocks and retirement plan on the same platform. If you cannot afford full shares yet, these two brokers provide fractional shares of meme stocks.

Top 3 meme stocks to buy in 2022

This section contains our top three picks of the best meme stocks to buy in 2022.

No. 1: Tesla (TSLA)

Price: $1,102.00

P/E ratio: 360.22

Market capitalization: $1.108 trillion

Tesla stock historical price data

Tesla stock historical price data

Based in California, Tesla is a designer and manufacturer of electric vehicles. It produces batteries from renewable energy, solar roof tiles, solar panels, and many other products. Its founders established the company in July 2003 and gave it the name Tesla Motors. This name is in honor of engineer and scientist Nikola Tesla. In 2004, Elon Musk became Tesla’s chairman, being the biggest shareholder of the stock. He became the company’s CEO from 2008 to the present.

No. 2: GameStop (GME)

Price: $213.94

P/E ratio: N/A

Market capitalization: $16.501 billion

GameStop stock historical price data

GameStop stock historical price data

GameStop is a merchant of gaming merchandise, consumer electronics, and video games. Stationed in Grapevine, Texas, GameStop is the world’s most prominent video game merchant. By January 2021, the firm has run 4,816 shops in different countries. At the beginning of 2021, GameStop appreciated due to simultaneous buying by investors in the social media platform Reddit. Because of the sudden price surge, the company gained attention from the press during the early months of 2021.

No. 3: PayPal (PYPL)

Price: $188.12

P/E ratio: 45.33

Market capitalization: $221.498 billion

PayPal stock historical price data

PayPal stock historical price data

GameStop is a merchant of gaming merchandise, consumer electronics, and video games. Stationed in Grapevine, Texas, GameStop is the world’s most prominent video game merchant. By January 2021, the firm has run 4,816 shops in different countries. At the beginning of 2021, GameStop appreciated due to simultaneous buying by investors in the social media platform Reddit. Because of the sudden price surge, the company gained attention from the press during the early months of 2021.

Pros and cons of the meme stocks

Pros Cons
  • There is a potential to make massive returns in a short time horizon.
  • The meme stock frenzy might not be sustainable. This could die down as we get back to normal living conditions after the pandemic episode. Investors may return to office work and have less time on their trading desks.
  • You can take positions earlier than other investors.
  • Supply and demand drive short-term market movements. Price may be volatile without clear direction, and you could suffer great losses.
  • Investors pushing meme stocks higher belong to the younger generation. They might be in the game for long, keeping the meme stock movement alive for decades.
  • Some meme stocks move purely on hype. Without solid fundamentals backing a stock valuation, the price could turn around quickly once the hype dies down.

 

Final thoughts

As covered in this post, meme stocks are legit companies. They have just seen massive growth lately due to their attention from investors banding together in social media. You can control the risk by applying diversification if you want to join the craze and participate in merrymaking. Only buy those stocks with better chances of generating returns.

Since meme stocks are generally volatile, your investment horizon should be relatively shorter. Get out quickly as soon as you gain sizable profits. If your investment loses value, apply the principle of cost averaging.

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