12 Reasons You Can Do Better Than Meme Stocks in 2021

Meme stocks are a relatively new phenomenon in the investing world. These are stocks that become popular on social media and often see their share price rise because of the hype. GameStop (NYSE: GME) is probably the best-known meme stock, but there are others out there.

With meme stocks getting a lot of hype recently, you may be considering investing in some of them. Unfortunately, this is almost assuredly a very bad idea that you'll come to regret.

The good news is, you don't need to invest in meme stocks if you want to get some money into the market. In fact, there are 12 key reasons why you can do better than buying shares of companies based on social media hype.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Meme stocks tend to see their share price rise and fall very rapidly. It's not uncommon to see the prices of these stocks change dramatically over the course of a trading day.

While this may sound good if you're looking at a 200% return on your investment, you also need to remember that you could just as easily lose most or all of your money in a matter of minutes.

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When a stock takes off as a meme, the price of the company's shares typically becomes totally divorced from the actual underlying value of the company.

The price isn't justified by the company's current performance or potential for growth, but rather is driven up by an irrational buying frenzy built on hype alone.

While meme stocks may send share prices rising, share prices will stay inflated only as long as interest in the company remains high on social media. The problem is, the attention span of people on the internet is short.

Most influencers and content consumers will be on to the next big thing within days or weeks, which can lead to a collapse in the share price once the company isn't being hyped up anymore.

Sometimes people make memes because they think they are funny. In other situations, they see a way for retail investors to stick it to the professional traders and pull one over on Wall Street.

But not all meme creators necessarily do so for altruistic reasons or even just for the laughs. There could be situations where people who are very good at pulling the levers of social media drive a stock price up (or down) for their own financial gain at the expense of investors who don't know any better.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Investing for the long term has consistently been proven to be the safest and best strategy for building wealth in the stock market. That's why investment greats including Warren Buffett have made clear their favorite holding period is "forever."

Meme stocks are definitely not meant to be long-term investments. And if you buy into them hoping to make a quick buck, you could be setting yourself up for big losses.

ALSO READ: Better Buy: Dogecoin vs. the Entire S&P 500?

Meme stocks are a relatively new phenomenon, so there's not much long-term data about how investors perform when they trade stocks based on social media hype.

But for the few meme stocks that have been hyped up for a while, the fluctuations in the price show it's difficult for most investors to actually make a profit over time.

When meme stocks send the price of a company's shares rising dramatically, the management of that business may decide to make a strategic move and issue more shares to raise capital.

This is especially likely since many meme stocks involve businesses that have been struggling. Unfortunately, in practice that means the value of current shares could be diluted and the price of the stock will generally fall as investors anticipate the consequences of the extra supply of shares.

For people outside of the online communities that hype up meme stocks, news of the latest investment may not reach them until the stock is already overhyped and overpriced.

The later you learn about a meme stock, the higher your cost per share will likely be since the attention will have already driven up the share price. This just increases the chances you'll suffer big losses.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Despite the growing power of retail investors, institutional investors still drive most market moves. These investors are often driven away from meme stocks because of the perceived risk they present.

And once institutional investors have decided to avoid a stock, it can take a long time for them to consider buying it again -- if they ever do. All of this means that once the hype dies down and the price of a meme stock falls, there's a great chance of it staying low for an extended time.

ALSO READ: 2 Stocks to Buy Now Instead of Dogecoin

Any investment involves some risk, but the risk of investing in a meme stock is much greater than most investments for all of the reasons mentioned above.

When you buy into a meme stock, you're essentially gambling that you can get in and out at the right time, which is far from a guarantee and which can be hard to predict. And if you miscalculate, there's a very good chance you'll permanently lose money because of the fact that a meme stock's price is rarely based on the fundamentals.

There's little reason to take this level of risk.

You don't have to invest in meme stocks to build wealth. There are other time-tested investing techniques out there that you can adopt that are likely to be much more successful for you in the long run.

ALSO READ: Ask Yourself These 3 Questions Before You Buy Your Next Stock

There's also plenty of opportunity to earn great returns with companies that capture the attention of investors for the right reasons -- because they are innovative, have a strong competitive advantage, and have a solid leadership team.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

While it may sound fun to invest in meme stocks, the purpose of investing isn't to have a laugh or even to try to make Wall Street traders mad. The goal should be to build financial security, and if you're serious about doing that, you'll steer clear of meme stocks.

Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.