Why do people still put their money into the riskiest parts of the market? Stories of modest investments turning into multimillion-dollar windfalls draw thrill-seekers and hungry investors like moths to a flame. However, chasing after gains like these is dangerous — for every story of someone who made it big, there are countless more about those who lost everything.
Still, the potential for quick wealth and the challenge of beating the odds are hard to resist for some investors. GOBankingRates spoke with Thomas Pratter, CEO and founder of Auto Whale, who was in the right place at the right time to profit hugely from meme stocks in 2021.
The Meme Stock Mania
The meme stock frenzy was a once-in-a-generation phenomenon. Fueled by social media hype against short-sellers, it showed the potential huge gains of this kind of high-risk investing. In the case of GameStop, a collective buying frenzy propelled the stock to stratospheric heights, creating a unique opportunity for huge short-term gains if you were able to time it just right.
“I made $31,000 by investing in GameStop and Dogecoin during the meme stock frenzy,” said Pratter. “Recognizing the volatile nature of these assets, I strategically timed my trades, capitalizing on rapid price fluctuations. GameStop’s unprecedented surge, fueled by retail investor enthusiasm, presented lucrative opportunities for short-term gains.”
Pratter demonstrated how you can seize a fortune amid chaos, if you’ve got the stomach and skills to trade it right.
Risk Management
But high risk requires advanced risk tactics. Unlike traditional long-term investments, you need to monitor these volatile stocks very closely so that you can move quickly when things change.
“Riskier stocks need to be monitored much more closely than safer, long-term investments,” said Justin Zacks, VP of strategy at Moomoo Technologies Inc. “Trading alerts and stop losses are great ways to manage such positions especially around events like earnings.”
Momentum cuts both ways. The same forces that propel stocks into the stratosphere can swiftly reverse, leading to brutal selloffs.
“Stocks that run up in a parabolic, rocket-ship fashion can crash just as easily,” said Zacks. “When they turn, they can turn fast. A lot of this is due to the herding of investor psychology. A stock can suddenly become a hot potato with investors looking to sell as quickly as possible.”
The Importance of Perspective
When the market is trending upward, it’s easy to become too confident. It can seem laughably easy to make fast money with risky investments, but you should always keep your cool and remember to be careful.
“A rising market like the one we have seen since October 2023 can help mask trading mistakes,” said Zacks. “Traders that excel in both bull and bear markets over many years can be more confident in their skills. Investors should be prepared for the possibility of losing most or all of their investment when trading risky stocks. Funds for these types of investments shouldn’t come from money needed for everyday living and to pay one’s bills. Riskier investments can be a small part of a diversified portfolio.”
Don’t let the prospect of easy money lull you into developing sloppy trading habits or convincing yourself that you’ve cracked an unsolvable code. No matter the potential rewards, high-risk investing should always be treated as highly speculative. You should always approach these investments assuming that you could lose everything.