3 lessons we can learn from memes stocks like GameStop


Even stocks have been one of the biggest phenomena in the investment world this year. Investments like GameStop (NYSE: GME), AMC Entertainment Holdings (NYSE: AMC), and Dogecoin (CRYPTO: DOGE) saw their prices explode overnight, and some investors made a lot of money from these stocks.

However, the stocks of memes are more dangerous than it seems at first glance. While their skyrocketing earnings make them tempting, there are a few things all investors can learn from them.

â–º Explanation: What is a meme stock and is it right for your market portfolio?

1. Market timing can be incredibly difficult

The difference between meme and growth stocks is that the growth of stocks itself is sudden and unfounded. GameStop, for example, had been on the verge of bankruptcy for years and announced the closure of more than 1,000 stores shortly before its prices skyrocket.

Since the stock price does not match the underlying fundamentals of these companies, these gains are unlikely to last long. Meme’s shares are rising rapidly as retail investors buy the shares en masse, which increases its price. Once these investors sell their shares and switch to another stock, the price will go down.

It’s not impossible to make money from meme stocks, but you will need to be extremely adept at timing the market. Selling at exactly the right time before prices fall is incredibly difficult, however, as these stocks – and the market as a whole – are unpredictable. If you wait a day or two longer to sell, the price may have already collapsed and you could lose money.

For this reason, it is better to buy solid stocks and hold them for the long term. Healthy companies are likely to see their stock prices rise over time, so you won’t have to worry about selling at the last second before the price drops.

2. If it looks like it’s too good to be true, it probably is.

One of the biggest attractions of even stocks is their huge price gains. For example, Dogecoin (which is technically a cryptocurrency but also falls under the umbrella of equities itself) has seen its price increase by nearly 12,000% in a matter of months. These returns are hard to ignore, and it can be tempting to buy these type of investments to avoid missing out on the chance to make a lot of money.

However, one of the golden rules of investing is that if it sounds too good to be true, it probably is. Meme stocks can show incredible returns, but if their trading fundamentals don’t match those gains, that growth is unlikely to be sustainable.

While it is considerably less exciting, investing in stocks with stable and consistent returns is a much safer bet than buying stocks that explode within days. You won’t get rich overnight, but you are more likely to generate positive returns over the long term.

3. Putting all your eggs in one basket is risky

When you look at the record returns of meme stocks, it’s easy to think about how much money you would have made if you had invested every dollar you have. But putting all of your money behind a single investment – even a relatively safe investment – is risky because if that security fails you have a lot to lose.

No matter where you choose to invest, it is wise to make sure you have a diversified portfolio which includes a wide variety of stocks from different industries. There is always a chance that one or two stocks might not perform well, but your money is much more protected when it is spread over many different investments.

Stocks themselves can be risky investments, but there is also a lot to be learned from them. If your goal is to earn as much as possible in the stock market, you might be better off buying stocks that are growing steadily and then holding them for the long term. You won’t become a millionaire overnight, but your money will stay safe and you could see big gains over time.

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Katie brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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