Meme Stocks and Get-Rich-Quick Schemes: The Rise and Fall
You’ve probably heard of memes at some point or another in your life. The term “meme” was coined by Richard Dawkins in his famous book, The Selfish Gene, in which he detailed how ideas and cultural phenomena function in similar ways to genes in evolution. While this idea may seem complex or hard to understand, memes are becoming increasingly relevant as their applications become more apparent in many aspects of life, particularly the internet. There has been a spillover effect in the world of finance; so-called “meme stocks” and other get-rich-quick schemes have been prevalent in recent years.
What are get-rich-quick schemes?
Get-rich-quick schemes are investment opportunities that promise high returns with little or no risk, and often with a relatively small upfront payment, often resulting in widespread omissions of material risks, complete investment loss and outright fraud. A modern example is a scam that circulated on Instagram throughout the COVID-19 pandemic, whereby a supposedly successful investor promised a return of $1500 with a $150 investment. Unfortunately, people fell for it and along with losing their $150 investment, never earned that ethereal $1500. So, what is a meme stock and how does it fit into this type of scheme? Meme stocks are shares of a company that gain popularity online and through social media memes. The hype that builds around the stock leads to increased demand and highly-inflated prices, as well as short squeezes. Once the price of the stock drops for reasons like poor fundamental performance, remaining investors may face substantial losses.
GameStop: the rise and fall of a meme stock
Arguably the most infamous meme stock is GameStop, which took center stage in August of 2020. The saga started when a YouTuber named Roaring Kitty posted a soon-to-be viral video claiming that shares of the brick-and-mortar video game retailer GameStop could rise from $5 to $50. He stated that the stock was heavily shorted by hedge funds, and that these funds would incur huge losses in the event of a short squeeze. This sparked a frenzy on platforms like Reddit, where thousands of users started buying GameStop shares through low-cost trading apps such as Robinhood. The short squeeze predicted by Roaring Kitty then became a reality, with the stock’s price skyrocketing to almost $500. Subsequently, the hedge funds with short positions ended up with colossal losses, leading some to shut down entirely.
How to avoid Get-rich-quick schemes
Get-rich-quick schemes have been around for a while, preying on the vulnerable and promising them the world. If you’ve ever pondered how to get rich quick, you may want to recalibrate your expectations and be wary of promises that do just that. There are a few things you can do to try to avoid falling for nefarious schemes.
1. Conduct a background check. Find reviews online and, better yet, in person from previous participants. It’s also generally recommended to check the Better Business Bureau to find out whether a business is legitimate or not (US, Canada, and Mexico).
2. Identify the current rates of return. Another step you can take is to check the lower- and higher-end rates of return in the market. You can find the lower expected return in the form of the average interest rates on a bank’s savings account. On average, the current interest rates in the US and the UK hover around 2.5%. Then, find an average market rate of return e.g. through a stock market index like the S&P 500. Assuming the market you choose offers a 10% return, your realistic range of expected returns is between 2% and 10%. Any proposed scheme that promises above 10% should be thoroughly examined.
3. Know what you’re investing in. This one is quite simple: think twice about investing your hard-earned money into something you don’t understand.
4. Consult with your financial planning or investment professional. Most investments, particularly thoughts in speculative, complex or highly-risky stocks, deserve the advice and consideration of a neutral investment professional. Even if you cannot hire a dedicated one-on-one financial planner to give you advice to stay away from a potential get-rich-quick scheme, there are a variety of online trading resources and tools that can offer dispassionate guidance about your next potential investment.
What should you do if you’re approached by someone claiming they can make you rich quickly? It would be wise to consider the age-old adage you’ve probably heard many times over: if it sounds too good to be true, it probably is!
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