The meme stock investment craze has exploded in recent years thanks to a number of factors, from commission-free trading apps to the rise of investment message boards to the influx of younger investors. And while a great amount of wealth has been created for some, many others have suffered tremendous losses by dipping their toes into this speculative arena.
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No investment is inherently good or bad, but some are more appropriate for certain types of investors than others. With some 47% of Gen Z investors admitting they have only been in the market for less than six months, according to a GOBankingRates study, the potential for understanding the risk of speculative investments like meme stocks is high.
Pros of Investing In Meme Stocks
The main benefit of investing in meme stocks is one that applies to all stocks — and to all investments, really. That is the potential to make money. However, meme stocks are in another category altogether when it comes to the magnitude of their potential gains.
Meme stocks can skyrocket hundreds of percentage points in a very short time, such as when GameStop popped 400% in a single week in 2021 or when AMC Entertainment was up over 3,000% for the year at one point. The very nature of meme stocks is that momentum traders pile into them all at once at the same time that professional short sellers are forced to cover their positions. The result in the market is that there are hardly any selling shareholders to absorb the buying momentum. This makes share prices escalate rapidly.
All this to say, if you get wind from online message boards that a buying frenzy is about to occur, you can step in front of it and make sizable profits quite rapidly.
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Cons of Investing In Meme Stocks
The primary con of investing in meme stocks is the opposite of the main pro. While meme stocks may offer the hope of big investing gains, they can also lead to outsized losses.
Just ask the investors who piled into AMC Entertainment when it was near its 2021 high of $62.49, as it is now trading at about $8. That amounts to a loss of 87%. Those are the types of portfolio-ruining losses that are irrecoverable if you have devoted too much money to them. And while it’s easy to say in hindsight that you would have never bought AMC at its all-time high, when it was happening, demand for the stock was at a fever pitch, with many investors thinking it would easily reach $100.
So, the main con of investing in meme stocks is that they are built on momentum, innuendo, rumor and hype rather than fundamentals, and it’s hard to say when they will come crashing down.
Gen Z Investors and Meme Stocks
Generation Z investors are at something of a crossroads. The standard definition of adult Gen Zers covers 18- to 25-year-olds, meaning these are young investors who have plenty of time to watch their retirement portfolios grow. Even small amounts invested at this young age can grow into huge, seven-digit retirement account values in the future, thanks to the power of compound interest.
Yet, at the same time, Gen Z has lived through a completely digital age. What are relatively new technologies to the rest of the world are part of the only world that Gen Z has ever known. To the average Gen Zer, the idea of paying a commission to execute a stock trade makes no sense, and retirement may seem like some distant dream. These factors may contribute to the desire of some Gen Zers to trade meme stocks, who may view the stock market as more of a quick-fire casino than the slow, long-term wealth-building mechanism it has proven to be historically.
What’s important for Gen Z investors to realize is that although meme stocks are exciting and potentially rewarding for a select few, many more investors lose significant sums trying to trade meme stocks. Even though Gen Z may be comfortable with fast, app-based trading of momentum or meme stocks, that doesn’t mean that age-old investment principles no longer ring true.
Most experts suggest that while it’s OK to “play” with about 5% of your portfolio in speculative areas like meme stocks, anything more than that can risk your long-term financial stability. While investing in meme stocks can be fun and exciting — and occasionally generate a spectacular profit — it’s best to separate that type of trading from your long-term savings program.
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This article originally appeared on GOBankingRates.com: Gen Z: Here’s the Case For — and Against — Investing In Meme Stocks