Virality or popularity can speed up your path to success if you want to create a strong social media presence. Of course, not everyone who views your content will stay with it for long, but you may be able to turn an instant sensation into the foundation of long-term success. The same theory applies to trending stocks: when a stock moves in a trend or “goes viral,” demand for its stock increases. And when demand for a stock rises, the price of the stock often rises as well.
Why do investors look for trending stocks? They look for any high-risk stock for the same reason: to make a lot of money in a short period. Trending stocks are inherently volatile, especially when the trigger is unreliable or based on incomplete information. And some stocks will trend for all the wrong reasons, such as: Super Micro Computer Inc. NASDAQ: SMCI did for his dubious accounting. In this article, we’ll explain trending stocks in detail and provide information on how to safely identify and invest in them.
What are trending stocks?
Why do stocks trend? The answer is often obvious, depending on the company or sector involved. Some trend is associated with good news, such as rising earnings or a significant share of the activist. Others lean towards bad news, such as a product failure or an accounting scandal. However, there does not always have to be a significant reason; Lists of trending stocks can come from tweets, Reddit posts, or TikTok videos. In fact, sometimes a stock will trend simply because its ticker symbol is similar to another trending stocks. (Yes, really. Look what happens to AMC Networks Inc. NASDAQ: AMCX every time AMC Entertainment Holdings Inc. New York Stock Exchange: AMC explodes.)
However, the common denominator is the catalyst of sorts that initially sets stock prices moving and gets investors talking. This catalyst is patient zero for the virality of trending stocks, and investors must determine their sustainability. Here are two examples to highlight this point:
1.GameStop: GameStop Inc. New York Stock Exchange: GME It was the original meme stock that sparked a huge viral surge when a Reddit trader named Keith Gill amassed a large stake and began posting his thoughts on the company’s financial situation. By mid-2021, the stock had rallied to unprecedented highs, but the rally was based on social media sentiment rather than a precise fundamental reversal. Shares collapsed after the trend faded and never approached 2021 levels.
2. NVIDIA: NVIDIA Company NASDAQ: NVDA has become one of the biggest winners in the AI-filled bull market, and its huge earnings releases often create viral trends of their own. However, NVDA has also been on the receiving end of some dumber catalysts, like when an online investor posts 10K showing someone in Congress is buying shares (Nancy Pelosi is almost guaranteed to trend here).
Trends can be unpredictable, so risk management is critical. You need to understand the sector or company the trending stock is in and be prepared to pivot quickly if the trend fizzles out faster than you expected.
Why trending stocks are popular
Trending stocks don’t just (potentially) line the pockets of their buyers. They create a sense of community, a group that can follow company news, express their thoughts and views, and share trading ideas and strategies.
If you’ve been on social media during the cryptocurrency rally, you’ve no doubt seen Bitcoin holders telling non-Bitcoin holders to “have fun while staying poor.” While not every community is full of people you’d invite to Thanksgiving, these shared goals influence investor psychology and create a sense of FOMO (fear of missing out) about the missing pieces of the rally.
Social media has allowed these trends to emerge much faster than in the pre-virtual era. Stocks had no chance to “trend” when people only discussed investing with their friends, family, and co-workers. But now, influencers with six- and seven-figure followers can talk about popular stocks, buy and create viral trends out of thin air, just like Keith Gill did with GME. Institutional investors have also taken note of the viral trends, with hedge funds competing for meme stocks as fiercely as retail traders on Reddit.
The benefits and risks of investing in trending stocks
Investing in trending stocks can be a mixed bag. Few stock market trends are backed by reliable fundamental and technical data, and social media is a prime breeding ground for scammers. Investing in trending stocks requires weighing the pros and cons based on your personal risk tolerance and investment plans.
Benefits of investing in trending stocks
- Quick profit: Trends can spread like wildfire through social media, creating big wins in a short time. Trending stocks are ideal for day and swing traders using momentum strategies that don’t necessarily care about fundamentals.
- Liquidity: Trending stocks are often associated with increased volume as more investors enter into the trade as the trend hits them. Where there is volume, there is high liquidity, which helps reduce transaction costs and creates a more efficient trading environment.
- High Visibility: Visibility is different from liquidity. Liquidity is just a number on a screen, but visibility means people are following and discussing a stock in real time. Instead of a number, you can present a (digital) face to other trading participants and share ideas with like-minded traders via social media.
Risks associated with investing in trending stocks
- Volatility: Trends cause excessive volume in a trade, creating volatile stock prices. If you’re a risk-averse investor, following trending stocks can create more stress than profit.
- The hype around the substance: Not every trend stands up to criticism. Meme stocks represented booming, struggling businesses that rode a wave of enthusiasm and quickly fell off once the excitement died down. You can still profit from the hype; just be clear about your strategy.
- Possibility of significant losses: If you invest for content and only get the hype, you could suffer big losses as the trend fades. Always set clear profit and loss guidelines when trading volatile stocks (and use stop losses!)
How to Find Trending Stocks
Finding the best trending stocks requires more than traditional due diligence. You will need to look for sources outside of the financial media; Here are five tips to consider.
1. Follow financial news
While you need a diverse set of news outlets, reputable financial sources are always a good starting point. Companies like Bloomberg, CNBC and Reuters have verified sources and accurate information on revenues, mergers and product lines.
2. Use stock screening tools
MarketBeat can help you find trending stocks using our various screening tools. For example, you can use Stock Screener to search for companies based on criteria such as surges in volume, unusual price movements, or recent new highs.
3. Analyze sentiment on social networks
Like it or not, social media platforms have a significant influence on trending stocks. If you want to follow trending stocks, the following apps are worth considering:
- X (formerly Twitter)
- Discord
- TikTok
Other platforms such as Threads and BlueSky are starting to gain market share. Additionally, you may want to consider stock-specific social communities like StockTwits or HootSuite, which can track conversations and sentiment across platforms for different stocks.
4. Check Google Trends.
Why not use the perfect trend tracking tool in your stock research? Google Trends tracks interest in specific search queries, showing how often popular topics or events are “viewed on Google.” Investors can use this to track interest in their holdings and find signals on when to sell or add more shares.
5. Follow influential investors
Influencers and accounts with large followings can move markets as easily as financial analysts or CNBC talking heads. To use influencers in your research, you need to find those who share your investment philosophy and methods. But remember that these people are often not trained stock analysts, and their opinions should never replace independent research.
Tips for investing in trending stocks
- Use different order types: Stop loss and take profit orders can help minimize risk by determining the exact prices at which you will close a trade. Using different order types helps you maintain a rules-based approach and eliminates emotions.
- Understanding Risk Tolerance: Do you know what kind of investor you are? If not, then the wild world of social media is a bad place to find out. Trending stocks are volatile and their movements are often meaningless. Investing in these companies requires a high risk tolerance.
- Avoid Hype: You can make a quick buck on trending penny stocks, but is the reward worth the potential loss? If you want to preserve your capital, try to avoid hyped companies with cult followings like AMC.
The trend is your friend until it isn’t.
Investing in trending stocks can be fun because your friends and social media followers may get involved. Entire communities have sprung up around stock trading, and some of these connections have led to real profits. However, it is necessary to consider the risks associated with these companies. The trend is your friend, until it isn’t. Always stay up to date with market trends and research companies thoroughly before purchasing shares.
Before you make your next trade, you’ll want to hear this.
MarketBeat tracks Wall Street’s top-rated and best-performing analysts daily and the stocks they recommend to their clients.
Our team has identified five stocks that top analysts are quietly whispering to their clients to buy now, before the broader market catches on… and none of the big name stocks made the list.
They believe these five stocks are the five best companies investors can buy now…
See the five stocks here
Which stocks are most likely to thrive in today’s challenging market? Click the link below and we’ll send you MarketBeat’s list of 10 stocks that will rise in any economic environment.
Get this free report