Ask the average person what they think realistic investment risks and returns should be and you will get many varying opinions. Typically, most of the well-known investment firms that have conservative, moderate, and aggressive approaches within their investment strategies are looking to annualize returns within those parameters. But with the pandemic altering the norm drastically in the investment world, many new eager investors have entered the markets looking for a faster turnaround. Lately, this new frontier of investing has created a new style of investing. Investors, welcome to the Meme Dream and The Short Selling Nightmare.
What is a Meme Stock?
A meme stock is one that has seen an increase in volume not because of the company’s performance, but rather because of hype on social media and online forums. For this reason, these stocks often become overvalued, seeing drastic price increases in short increments. It usually starts with a smaller number of investors who believe a particular stock is undervalued and they begin to buy in large quantities. The stock’s price slowly begins to increase. More individuals then start buying, and the stock’s price skyrockets upward and news about the stock spreads across social media and online forums.
Types Of Meme Lingo:
• Buy The Dip – Basic investment principle of “BUY LOW, SELL HIGH” but with a more targeted approach.
• BUY HIGH, SELL LOW – A joke used by switching the words around in the common saying BUY LOW, SELL HIGH and aimed at people who panic BUY and panic SELL.
• Diamond Hands – Continuing to hold a stock despite being up or down dramatically within the volatility with hopes the price will keep going up.
• Paper Hands – Someone who sells too early.
• To The Moon – A hopeful massive increase in price of an investment to extraordinary levels. If it happens it is said to be “Mooning” when it reaches its “To The Moon” levels.
• HODL – Hold On for Dear Life.
• YOLO – You Only Live Once.
• FOMO – Fear Of Missing Out.
What Is Short Selling And A Short Squeeze?
Short selling is an investment or trading strategy that speculates on the decline in a stock price. It is an advanced strategy that should only be undertaken by experienced traders and investors. Short selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money. A short squeeze is an unusual condition that triggers rapidly rising prices in a stock. For a short squeeze to occur the stock must have an unusual degree of short-sellers holding positions in it. The short squeeze begins when the price jumps higher unexpectedly and the shorts have to cover.
Types of Short Squeezes:
• Profit Squeeze – When a company and its profit margins have decreased or are in decline in earnings over a period of time.
• Credit Squeeze – A credit squeeze describes any situation where it becomes difficult to borrow money from banking institutions. This type of squeeze normally happens when an economy is in a recession or when interest rates are rising.
• Long Squeeze – In a strong financial market when there are sharp price decreases, investors sell a portion of their position, pressuring more long holders of the stock into selling their shares to protect against a dramatic loss.
• Bear Squeeze – When investors are forced to buy back their shares at a higher price than they short sold it for when entering the trade, due to rising prices. A bear squeeze is typically a short squeeze.
• Liquidity Squeeze – When a financial event sparks concerns among financial institutions (such as banks) regarding the short-term availability of money. A shortage of available credit for businesses and consumers. This situation could arise when lenders are reluctant to lend because of uncertainty of defaults.
• Financing Squeeze – When borrowers find it difficult to obtain capital because lenders fear making loans. This often leads to a liquidity crisis if there is little cash on hand and not enough operating cash flow.
The combination of the meme stocks and short selling is what has caused this new style of investing to come about. They are extremely risky, but investors find ways to make sense of it all as they see the price fluctuations daily. At Ironcrest Capital Management, we strive to make sure that everyone we work with has a strong understanding of The Meme Dream & The Short Selling Nightmare within their investments. Having a good approach and focus on the most important factors before investing is key. Let us help you make the right decisions. If your current investing approach isn’t working, reach out to us so we can help.