Reddit stocks is a term that is given to shares such as GameStop and AMC Entertainment. Reddit is a social media platform that allows users to chat, comment, and post in forums on almost any topic. Retail investors have used this platform in particular to group together and buy stocks that they believe are going to rally. Due to the size of the following, it can (and has) moved the share price of the above companies.
Positive takeaways from Reddit stocks
I would call myself a traditional investor. I look at companies from the perspective of my thoughts on the broader economy. When working my way down to an individual stock level, I analyse the company outlook, financials, and latest news. At no point in this process, do I post my thoughts on Reddit or any other social media site.
However, I’m conscious that the way we invest is always changing and evolving. There are various things that I can take from the rise of Reddit stocks to make myself a better investor.
First, it’s clear that the stock market is becoming more transparent in nature, both in discussions and actually buying. It’s also being opened up to retail investors like me. The access to investment platforms is much easier, allowing Reddit users and others the ability to buy the stocks being spoken of. I see this as a good thing, making investing more accessible to all.
Second, the large swings in Reddit stocks highlight the power of retail investors in large numbers. From communicating on such sites, a combined movement is able to influence the price of a stock. My takeaway from this is that momentum investing is becoming more important. Whereas before I would favour value investing, momentum investing is certainly presenting more opportunities.
Caution needed with volatility
A takeaway from the Reddit stock surge that I don’t think is getting enough attention is the risks. The high volatility seen on wild swings during the day can make large profits, but also large losses. My thoughts here is that volatility is good, but only to a certain point. Such high levels mean that emotional investing takes hold. Often, this results in poor decision making.
Following on from this point of buying based on emotion (or FOMO), is the timing element. Most of these stocks surge in a matter of days. It’s impossible to perfectly time this move when looking to buy a Reddit stock. After missing the first move, I’d then be buying in at already elevated levels.
Rather, I’d much prefer to stretch out my time horizon to a period of years instead of days. I accept that this might sound boring, but this does reduce the risk and increases the probability of generating a profit.
Reddit stocks are certainly an interesting phenomenon that has come from 2021, with plenty of lessons that I can glean from it.
The post 4 things I can learn from Reddit stocks as a traditional investor appeared first on The Motley Fool UK.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021