There's a good chance you have seen the term "meme stock" splashed across headlines before — even if you aren't actively following business news.
Meme stock crazes, which in the past have been driven largely by investors on social media platforms and in online forums like Reddit, cause certain stocks to go viral. Perhaps the most famous in recent history was the WallStreetBets Reddit thread that encouraged people to buy GameStop and AMC Entertainment stock at the beginning of 2021.
But what is a meme stock exactly? Below, CNBC Select explains these types of investments, plus where you're likely better off putting your money instead.
What we'll cover
- What's a meme stock?
- Where to put your money instead of meme stocks
- If you do want to trade meme stocks
- Bottom line
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What's a meme stock?
Meme stocks refer to a select few stocks that gain sudden popularity on the internet and lead to sky-high prices and unusually high trading volume. While some Reddit traders were able to make a lot of money in a short amount of time by buying and then selling AMC and/or GameStop at the exact right moment, investing in meme stocks is generally very risky.
A meme stock's value is a result of its hype on social media and not necessarily the company's performance. Though there is a potential for monumental gains, meme investors are more likely to experience potentially bigger losses as the stocks become overvalued and their price dramatically plummets.
Where to put your money instead of meme stocks
Though the idea of amassing crazy wealth overnight is obviously appealing, the reality is that the odds are heavily stacked against anyone trying to outsmart the market. The meme investors who walked away with a lot of money were arguably just very lucky. This kind of trading is ultimately not that much different than gambling.
Instead of actively trying to find the next hot stock, you're better off with a more hands-off approach of index investing. Unlike individual stocks, index investing offers automatic diversification that spreads out your risk so you don't have to worry that you'll lose all your money with one bad trade. (Of course, all investing involves some amount of risk.)
How to invest in an index fund
To invest in an index fund, you need to open a brokerage account, a traditional IRA or a Roth IRA. You can often choose to invest in index funds via your employer-sponsored 401(k), too.
A broker like Vanguard is a good choice for passive investors who want to hold funds long-term as it doesn't offer many tools for those who are more active traders or interested in short-term trading. Vanguard also stands out for its low costs. Expense ratios (basically the management costs) for its ETFs and mutual funds are some of the lowest around, with an average of 0.10%, meaning every $10,000 invested costs $10 annually.
Vanguard
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Vanguardaccount, but minimum $1,000 deposit to invest in many retirement funds; robo-advisor Vanguard Digital Advisor® requires minimum $3,000 to enroll
Fees
Fees may vary depending on the investment vehicle selected. Zero commission fees for stock and ETF trades; zero transaction fees for over 3,000 mutual funds; $20 annual service fee for IRAs and brokerage accounts unless you opt into paperless statements; robo-advisor Vanguard Digital Advisor® charges up to 0.20% in advisory fees (after 90 days)
Bonus
None
Investment vehicles
Robo-advisor: Vanguard Digital Advisor® IRA: Vanguard Traditional, Roth, Rollover, Spousal and SEP IRAs Brokerage and trading: Vanguard Trading Other:Vanguard 529 Plan
Investment options
Stocks, bonds, mutual funds, CDs, ETFs and options
Educational resources
Retirement planning tools
Terms apply.
Once your account is open and funded, you can also choose from a number of different index funds, like an fund, a fund that tracks government bonds or a fund that tracks international stocks. Funds that track the S&P 500 are generally an effective way to earn a good return on your money over time. Historically, the average annual return for the S&P 500 hovers around10%. Of course, past returns do not guarantee future gains.
Charles Schwab has funds that are straightforward options with no investment minimum. Expense ratios can be as low as 0.02%, meaning every $10,000 invested costs $2 annually.
Charles Schwab
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One®Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit
Fees
Fees may vary depending on the investment vehicle selected. Schwab One®Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract
Bonus
None
Investment vehicles
Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One®Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account
Investment options
Stocks, bonds, mutual funds, CDs and ETFs
Educational resources
Extensive retirement planning tools
Terms apply.
For an option with no expense ratio whatsoever, consider what Fidelity offers. The brokerage has funds that track large-cap stocks, which the website says, "are considered to be stocks of the largest 500 U.S. companies."
Fidelity Investments
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go®account, but minimum $10 balance according to the investment strategy chosen
Fees
Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)
Bonus
Find special offers here
Investment vehicles
Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other:Fidelity Investments 529 College Savings; Fidelity HSA®
Investment options
Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares
Educational resources
Extensive tools and industry-leading, in-depth research from 20-plus independent providers
Terms apply.
If you do want to trade meme stocks
For those still itching to trade the next viral stock, invest only with money you can afford to lose. Before you invest, you should make sure you already have an emergency fund set aside, you've paid off your high-interest debt and you're already contributing to a retirement account (and meeting any 401(k) employer match, if applicable).
When you're ready to buy stocks, your first need to open a taxable brokerage account. Robinhood and Webull are two popular trading platforms for active investors, boasting easy-to-use mobile investing apps. Plus, they offer IRAs (traditional, Roth and rollover) so users can manage their retirement funds along with their stocks all in one place.
Robinhood
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum required to open an account or to start investing
Fees
Fees may vary depending on the investment vehicle selected. Commission-free trading; regulatory transaction fees and trading activity fees may apply
Bonus
Robinhood will add 1 share of free stock to your brokerage account when you link your bank account and fulfill the conditions in your promotion (you'll be able to keep the stock or sell it after 2 trading days)
Investment vehicles
Brokerage account: Robinhood Financial commission-free investing
Investment options
Stocks, ETFs, options trading, fractional shares, IPOs, plus certain cryptocurrencies through Robinhood Crypto (depending on where you live)
Educational resources
"Investing basics" blog, an online library of content and Robinhood Snacks daily newsletter
Terms apply.
Webull
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum required to open an account or to start investing
Fees
Fees may vary depending on the investment vehicle selected. Commission-free trading; regulatory transaction fees and trading activity fees may apply
Bonus
Get 5 free stocks when you open and fund a new account: Sign up with Webull to get your 2 free stocks, each valued up to$300, and deposit any amount to receive 3 free stocks, each valued up to$3,000
Investment vehicles
Brokerage account: Webull commission-free investing IRA: Traditional, Roth, Rollover IRAs
Investment options
Stocks, ETFs, options trading, fractional shares, IPOs, ADRs, plus certain cryptocurrencies through Webull Crypto
Educational resources
Terms apply.
Both companies also allow investors to buy fractional shares of stocks, so you can buy a piece of the action without getting in too deep. Experts generally suggest keeping individual stock picking limited to 5% to 10% of your overall investment portfolio.
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Bottom line
While it can be tempting to get in on a meme stock craze, your money is safer invested in other ways like through index funds.
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