Friday, June 24, 2022 by DividendStocks.com Staff
When many investors hear the words Reddit stocks, they immediately think of stocks like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC). These stocks, among others, brought the phrase “meme stocks” into the mainstream. And they were particularly popular with retail investors many of whom traded on the internet community, Reddit.
But the Reddit community is about far more than meme stocks. This is a well-established community that can be one part of an investor’s due diligence. An important way that Reddit can help retail investors is that it gives them an idea of where investor sentiment is trending.
In this article we’ll explain the significance of Reddit stocks and how they can help predict investor sentiment.
The Intersection of Community and Capital
In early 2021, Alexis Ohanian, the co-founder of Reddit described the online community as “the intersection of community and capital. It’s the intersection of social media and finance.” When Ohanian launched the forum in 2012 he did so with the intention of creating an avenue for a community to trade investment ideas.
Retail investors will never be able to provide the same liquidity of institutional investors. But, with over 10 million members, Reddit can provide strength in numbers. A look at the popular Reddit stocks can give retail investors an idea of where a significant amount of retail money is flowing.
A Wider View
Since 2020, many retail investors flocked into the market based on what can be called macro themes. First, investors could invest in e-commerce and work-from-home stocks as Americans sheltered in place in the early days of the pandemic. Other macro themes included vaccine stocks and reopening stocks. And more recently, it’s been oil and gas stocks and even dividend stocks.
And this is another way that the Reddit community can help investors. It helps them look at the market with a wider lens and pick up on trends as they are emerging.
Not Just About Meme Stocks
In 2020 and 2021, the term “Reddit stocks” began trending. This was largely due to the group of stocks which became known as the “meme stocks.” Many of these were inexpensive stocks (but not necessarily undervalued). Some had high short interest. A number of them were penny stocks. Meme stocks were loosely classified as stocks that were trading well above their fundamental value.
This gave many traditional investors the impression that Reddit was the Wild West. And that view seemed to get support when many of those stocks dropped sharply when the stock market began correcting at the end of 2021.
But Reddit stocks are not just about meme stocks. In fact, you don’t have to look very far down the list to see companies like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). These are two of the dominant names in the tech sector and largely considered to be stocks that investors can own regardless of what is happening in the broader economy.
Serving Two Audiences
The fact that you can have a stock like GameStop and a stock like Apple as two of the most popular Reddit stocks should remind you that no two investors are alike. It’s also a reminder that there’s a distinct difference between investors and traders.
Many traders get trading ideas from the Reddit community. But a stock that sets up well for traders may not be suitable for long-term investors. In fact, many of the meme stocks are not appropriate for long-term investors. And that’s where due diligence comes into play.
This Time is Not Different
It’s common to hear the phrase “this time is different” as it relates to one phenomenon or another in the stock market. But this is wishful thinking that justifies buying assets at a higher price than you’re comfortable paying. The 2021-2022 slide into a bear market is the latest example of why fundamentals such as revenue and earnings matter. And of those two, earnings matter the most.
Some Final Thoughts on Reddit Stocks
Like any investing forum, Reddit will give investors some hits and some misses. It’s not meant to take the place of an investor’s due diligence. What Reddit can do best is give investors a key measure of where investor sentiment lies. And just as importantly it can provide strength in numbers.
However, investors must be careful that the Reddit community doesn’t replace their own due diligence. Some trending Reddit stocks don’t fit with an investor’s individual investment objectives and goals.