Are Meme Stocks a Risky Bet or a Chance for Big Gains?

Tuesday saw a spike in the value of several "meme stocks," or businesses whose valuation is driven more by social media talk than by more conventional economic factors like growth and profitability. After GameStop's 72% increase on Monday, these stocks have soared in the stock market for the second day.

Pre-market trading on Tuesday saw a rise in other favorites with WallStreetBets, the Reddit site that sparked the meme-stock frenzy three years ago. A movie theater operator, AMC Entertainment, had a 31% share increase, and BlackBerry saw a 12% gain. Shares of GameStop surged by 60%.

The meme stock phenomenon is back, owing to trader Keith Gill, aka "Roaring Kitty," who returned to X on Sunday night after a three-year absence. Gill posted a drawing of a guy leaning forward in a chair. After purchasing GameStop shares for $53,000 in 2019 and allegedly turning them into a multi-million dollar holding because of the stock's buzz, Gill rose to prominence as the face of meme stock traders.

Meme Stock Mania Returns

Traders are talking about meme stocks on WallStreetBets once more. Some traders shared images of their winnings from companies like AMC, BlackBerry, and other stocks. Investors encouraged investors to acquire stakes in GameStop and other meme favorites using the slogan YOLO, or "you only live once."

The resurgence of meme stocks is also boosting other companies, such as SunPower Corp., a photovoltaic solar energy company, which saw its shares surge by 60% on Tuesday. Similarly, Plug Power, a company specializing in hydrogen fuel cell systems, experienced a gain of 19%.

Additionally, Virgin Galactic, Richard Branson's spaceflight company, saw its stock rise by 22%. The interest in SunPower and Plug Power may be attributed, in part, to President Joe Biden's recent announcement of new tariffs on Chinese electric vehicles, solar cells, and other related products. This development likely sparked interest among traders, contributing to the upward movement of these stocks.

Riding the Meme Stock Wave

The appeal is straightforward: the chance to quickly make a sizable profit in a little amount of time, along with the added benefit of humiliating Wall Street's elite traders who have avoided meme stocks.

Shares of AMC, BlackBerry, GameStop, and other firms that surged higher in early trading on Tuesday were already erasing a large portion of their gains by the afternoon, demonstrating the dynamic in action.

Not ordinary investors, but hedge funds and other traders who had placed bets that GameStop's stock would fall, are among the first fatalities. A trade using this tactic, known as short selling, can profit investors if a stock decreases while losing them money if shares increase.

Data provider S3 Partners said hedge funds that were short GameStop on Monday lost more than $1 billion.

Due to the possibility of creating a "short squeeze," which happens when a shorted company rises in value and forces short sellers to cover their bets by purchasing the stock, these firms tend to draw meme stock investors.

The surge in interest in meme stocks coincides with a wider collapse in the financial markets, driven by high corporate profits and rapid economic expansion. Over the past year, the tech-heavy Nasdaq and the Dow Jones Industrial Average have increased by 33% and 18%, respectively, while the S&P 500 has gained 26%.

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