Meme Stock Frenzy Could Spark Debate

PUBLISHED Aug 3, 2022, 5:37:35 PM        SHARE

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In January 2021, retail investors (individual investors) who frequented investing groups on social media site Reddit caused an unexpected frenzy. Ailing stocks for GameStop and AMC Theaters, disdained by institutional investors (investment firms) and even short sold by them, suddenly soared due to purchases by thousands of Redditors. Investors on r/wallstreetbets used their individual trades to buoy meme stocks - stocks that are popular because of social media hype and consumer sentiment rather than financial analysis. While the meme stock craze died down, it is back with a vengeance: AMTD Digital stock has soared 21,000% in value due to those eager Redditors.

What's the Controversy Around Meme Stocks?

Last year, the GameStop frenzy angered institutional investors, who lost money on the short sell. A sociopolitical grudge match erupted, with many retail investors - part of the "Redditor army" - viewing their foil of the short sell a bit of social justice against hedge funds that made money by betting against the success of American companies. Institutional investors argued for greater regulation of retail investors to protect the stock market. Conversely, retail investors demanded regulation of investment firms that allegedly limited their ability to trade.

Meme stocks are controversial in that they are highly volatile and result in unexpected demands for cash when they are sold. For example, Robinhood allegedly limited trading on GameStop during the frenzy because it lacked the cash to pay investors who sold their GameStop shares. Other controversies abound regarding meme stocks being almost entirely driven by consumer speculation rather than company performance. For example, the current frenzy around AMTD Digital has given a company with only $25 million in revenue an astonishing $400 billion market cap. When the bubble bursts, as it arguably will do soon, many retail investors will lose almost all of their investment in the stock.

But, of course, many retail investors see the demands of institutional investors to limit "frenzied" trading as patronizing and unfair. Critics of institutional investor complaints about "dumb money" being "thrown around" by retail investors argue that these big investment firms simply don't want anyone to cut in on their profits. As for the Redditor army being able to upend an entire stock market? It's very unlikely, as retail investors only comprise about 20 percent of all trading - major investment firms still own the vast bulk of stocks!

Should I Buy Meme Stocks?

It's probably not a good idea to invest any significant amount into meme stocks, as their crash is almost inevitable. However, some might view a token investment as acceptable, akin to the fun of gambling. Just like in Vegas, don't use any money you're not prepared to lose!

If you don't have a day job that allows you to check your stocks regularly, it's probably even riskier to buy meme stocks. In order to profit, you've got to be able to sell quickly, as the slide will be fast! Not being able to sell until the next day the market is open will likely leave you at a loss. If you can't access your investing app or website throughout the trading day, you'd almost be better saving that AMTD Digital money for your next trip to the casino.

For those who want the benefits of hyped-up meme stocks with less risk, there is an ETF for that: MEME.

Future of Meme Stock Frenzies

Since GameStop, there has been pressure for the government to put additional regulations on retail investing. How the pressure continues may depend on how quickly the AMTD Digital frenzy fizzles, leaving some investors with heavy losses. With the U.S. economy in rough shape, there seems to be more incentive for Congress to propose stricter regulations for both stocks and cryptocurrency. Will this infringe on retail investor freedom? We'll have to wait and see.

I/we have no positions in any asset mentioned, and no plans to initiate any positions for the next 7 days

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