On Monday, Keith Gill, known online as “Roaring Kitty,” posted a picture on X — marking the first time he’s engaged with the social media platform in about three years.
For most people, a return to social media wouldn’t be remarkable. But Gill isn’t most people. Between 2020 and 2021, he became one of the key internet personas who encouraged an army of day traders to heavily invest in GameStop, kicking off the “meme stock” frenzy.
And in 2024, it appears that meme stocks are rallying again. On Monday, GameStop’s share price soared by around 70% throughout the day and trading was paused multiple times due to volatility. On top of that, short sellers lost $1 billion due to GameStop’s sudden price rise, according to data from S3 Partner.
Short sellers are individual investors or hedge funds who believe a certain stock’s price will decline. They borrow shares of that stock, sell them, then buy them back when the share price falls and earn a profit from the difference. However, a lot can go wrong with this strategy. If the stock price doesn’t fall the way the short sellers anticipated, they can lose money, as happened with GameStop.
Investors should also be wary of chasing meme stocks with the expectation of earning a profit. Here’s why.
Why investors should be wary of ‘meme stocks’
When it comes to meme stocks like GameStop, it’s important for investors to consider what is motivating them to invest, says Douglas Boneparth, a certified financial planner and the president of Bone Fide Wealth.
“Retail investors need to be wary,” he tells CNBC Make It. “Is [fear of missing out] leading the way or is this legitimately a great opportunity to jump in?”
To answer that question before investing in any stock — meme stock or not — investors should research a company’s core business model, as well as factors like how it plans to increase revenue over the long term, Boneparth says.
“At the end of the day, you’ve got to look at the business itself,” he says. “To give GameStop some credit, they really used their previous opportunity as a way to kind of turn the company around, take it from a struggling business to one that’s doing a lot better.”
However, instead of hand-selecting stocks, a more hands-off approach tends to make sense for most investors. Since exchange-traded funds and mutual funds aim to mirror a market index like the S&P 500, these types of funds allow you to spread your investment across a wide swath of top-performing U.S. companies, creating automatic diversity.
Ultimately, stock market investors would be smart to think long-term and avoid attempting to use a company’s short-term performance to predict how it may behave in the future.
“If you have conviction over any company or any stock and you want to have it part of your portfolio, you’re gonna need to have the discipline to hold on to that stock for a long time,” Boneparth says.
Want to make extra money outside of your day job? Sign up for CNBC’s new online course How to Earn Passive Income Online to learn about common passive income streams, tips to get started and real-life success stories. CNBC Make It readers can use special discount code CNBC40 to get 40% off through 8/15/24.
Plus, sign up for CNBC Make It’s newsletter to get tips and tricks for success at work, with money and in life.
Read More: GameStop stock surges over 70%—but investors should still be wary of ‘meme stock