What are they and why you should be careful buying them
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Chances are, you’ve seen the term “meme action” grab the headlines in the past year or so, even if you aren’t actively following business news.
The craze for memes stocks, driven largely by investors on social media platforms and online forums like Reddit, caused some actions to go viral. Perhaps the most famous is the WallStreetBets Reddit thread which encouraged people to buy GameStop and AMC Entertainment shares early 2021.
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But what exactly is a meme stock?
Stock meme refers to a few select stocks that are suddenly gaining popularity on the internet and lead to sky-high prices and unusually high trading volume. While some Reddit traders have been able to make a lot of money in a short period of time by buying and then selling AMC and / or GameStop at the right time, investing in stocks even is usually very risky.
The value of a meme share is a result of its social media hype and not necessarily the company’s performance. While there is the potential for monumental gains, investors in memes are more likely to incur potentially larger losses as stocks become overvalued and their price drops significantly.
Where to put your money instead of meme stocks
While the idea of amassing insane wealth overnight is obviously appealing, the reality is that the odds are dire against anyone trying to outsmart the market. Memes investors who walked away with a lot of money may have been very lucky. This type of trading is ultimately not very different from gambling.
Instead of actively trying to find the next trending stock, you’re better off taking a more passive approach to index investing. Unlike individual stocks, index investing offers automatic diversification that spreads your risk so you don’t have to worry about losing all of your money on one bad trade. (Of course, there is some risk involved with any investment.)
How to invest in an index fund
A broker like Avant-garde is a good choice for passive investors who want to hold funds for the long term as it does not offer a lot of tools for those who are more active traders or interested in short term trading. Vanguard is also distinguished by its low costs. The expense ratios (essentially management fees) of its ETFs and mutual funds are among the lowest in the market, averaging 0.10%, which means that every $ 10,000 invested costs $ 10 per year. .
Once your account is opened and funded, you can also choose from a number of different index funds, such as an S&P 500 fund, a fund that tracks government bonds, or a fund that tracks international stocks. Funds that follow the S&P 500 are generally an effective way to generate a good return on your money over time. Historically, the S&P 500 average annual return hovers around 10%. Of course, past performance is no guarantee of future gains.
For an option without any expense ratio, consider the loyalty ZERO Large Cap Index (FNILX). Although the fund does not technically replicate the S&P 500, the Fidelity US Large Cap Index tracks large cap stocks, which the website says, “are considered stocks of the 500 largest US companies.”
If you want to trade stocks even
For those who still feel like trading the next viral stock, invest only with money you can afford to lose. Before investing, you should make sure that you already have an emergency fund, that you have paid off your high interest debt, and that you are already contributing to a retirement account (and that you are responding to any matching employer. 401 (k), if applicable).
When you are ready to buy stocks, you must first open a taxable brokerage account. Robin Hood and Webull are two popular trading platforms for active investors with easy-to-use mobile investing apps. Additionally, Webull offers IRAs (Traditional, Roth, and Rollover) so users can manage their retirement funds as well as their stocks in one place.
Both companies also allow investors to buy fractional shares, so you can buy a portion of the stock without going too deep. Experts generally suggest limiting the selection of individual securities to 5% to 10% of your overall investment portfolio.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.