Meme stocks appear to be making a bit of a comeback. The market had thought that it had seen the last of meme stocks when the pandemic ended. Clearly not.
The best thing about meme stocks is that it shows that the market is working. The worst thing about meme stocks is that it shows that the market is working.
Meme stocks are essentially shares that have aroused the animal spirits of the social-media crowd. When enough people throw enough money at a particular stock, it stands to reason that the share price could rise.
As increasingly more people buy the shares, the price could even shoot up exponentially. But they could fall just as quickly when sellers ditch their shares in droves. There is something else.
Generally, but not always, these shares could have poor fundamentals. So poor in fact that some investment houses might decide to short the shares. In other words, they might borrow shares to sell immediately in the hope that they can buy them back later at a lower price before they have to return them to the seller.
But the meme crowd could scupper many a shorter’s well-laid plans by forcing up the share price. It could even push the shorter to scramble to buy shares that could push the share price even higher.
That is how a stock market is supposed to work. It is a place where price discovery can take place. Shares rise when there are more buyers than sellers. They fall when there are more sellers than buyers. It couldn’t be any simpler.
There isn’t a whole lot that we can do about share price movements. But in my book, Your Path To Salary Independence, I highlight the importance of building a portfolio. It could go some way to protect us not only from the vagaries of the market but also how to properly handle meme stocks.
If we are income investors, we should have nothing to fear. We are paid dividends regardless of what might happen to share prices. But our job is to work out the yield on the asset over the lifetime of the asset.
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