The term “meme stock” is not so easily defined as is a more traditional option such as a “value stock” or a “growth stock.” Most usages refer to a stock where the share price is pushed significantly higher by individual investors, as opposed to institutional investors. Typically, there is some viral component to the meme stock’s explosion as the message spreads through the internet. Some people have made a lot of money investing in meme stocks like GameStop or AMC Entertainment Holdings. But, are they right for you?

Understanding the risks in meme stock trading 

There’s no denying there are earning opportunities with meme stocks, yet the biggest downside is their unpredictable nature. A meme stock’s price is based more on online hype and less on the fundamentals of the company’s underlying business. With social media further fanning the fires of interest, more and more people buy the stock with resultant higher and higher prices. With a price that’s artificially high, it is inevitable the price will fall. Knowing when to get out becomes critical especially if you’re one of the investors who came in late when the stock was likely already overvalued. Investors are essentially playing a guessing game; if you’re right, you can benefit, but if you’re wrong, you’re going to lose. Take a look at where GameStop stock has been:

Financial planning using fundamental analysis

Rather than guess where a stock is headed based on trends or popularity, many investors choose instead to look to invest in businesses that have strong financial reports and positive prospects for future growth. Using principles of value investing and seeking growth stocks removes much of the urgency of the inevitable price fluctuations. A fundamental analysis approach allows the investor to be better positioned for the long-term while minimizing risk to the extent possible.

The Spinnaker wealth management approach

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Disclosure

The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.