There's a good chance you have seen the term "meme stock" splashed across headlines before — even if you aren't actively following business news.
Meme stock crazes, which in the past have been driven largely by investors on social media platforms and in online forums like Reddit, cause certain stocks to go viral. Perhaps the most famous was the WallStreetBets Reddit thread that encouraged people to buy GameStop and AMC Entertainment stock at the beginning of 2021.
But what is a meme stock exactly? Below, CNBC Select explains these types of investments, plus where you're likely better off putting your money instead.
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What's a meme stock?
Meme stocks refer to a select few stocks that gain sudden popularity on the internet and lead to sky-high prices and unusually high trading volume. While some traders are able to make a lot of money in a short amount of time by buying and then selling a meme stock at the exact right moment, investing in meme stocks is generally very risky.
A meme stock's value is a result of its hype on social media and not necessarily the company's performance. Though there is a potential for monumental gains, meme investors are more likely to experience potentially bigger losses as the stocks become overvalued and their price dramatically plummets.
Where to put your money instead of meme stocks
Though the idea of amassing crazy wealth overnight is obviously appealing, the reality is that the odds are heavily stacked against anyone trying to outsmart the market. Meme investors who end up walking away with a lot of money are arguably just very lucky. This kind of trading is ultimately not that much different than gambling.
Instead of actively trying to find the next hot stock, you're better off with a more hands-off approach of index investing. Unlike individual stocks, index investing offers automatic diversification that spreads out your risk so you don't have to worry that you'll lose all your money with one bad trade. (Of course, all investing involves some amount of risk.)
How to invest in an index fund
To invest in an index fund, you need to open a brokerage account, a traditional IRA or a Roth IRA. You can often choose to invest in index funds via your employer-sponsored 401(k), too.
A broker like Vanguard is a good choice for passive investors who want to hold funds long-term as it doesn't offer many tools for those who are more active traders or interested in short-term trading. Vanguard also stands out for its low costs. Expense ratios (basically the management costs) for its ETFs and mutual funds are some of the lowest around.
Vanguard
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Vanguard account, but minimum $1,000 deposit to invest in many retirement funds; robo-advisor Vanguard Digital Advisor® requires minimum $100 to enroll.
Fees
Fees may vary depending on the investment vehicle selected. Zero commission fees for stock and ETF trades; zero transaction fees for over 3,000 mutual funds; $20 annual service fee for IRAs and brokerage accounts (waived with at least $50,000 in qualifying Vanguard assets or by opting into paperless statements); robo-advisor Vanguard Digital Advisor® charges approximately 0.15% net advisory fee annually (after fund revenue credits; 90-day fee waiver for new clients).
Bonus
None
Investment vehicles
Robo-advisor: Vanguard Digital Advisor® IRA: Vanguard Traditional, Roth, Rollover, Spousal and SEP IRAs Brokerage and trading: Vanguard Trading Other: Vanguard 529 Plan
Investment options
Stocks, bonds, mutual funds, CDs, ETFs and options
Educational resources
Retirement planning tools
Terms apply.
Pros
- No commission fees for stock and ETF trades
- No transaction fees for over 3,000 mutual funds
- One of the largest ETF and mutual fund offerings available, with an average expense ratio of 0.07%
- Robo-advisor Vanguard Digital Advisor® available with 90-day fee-free trial and approximately 0.15% net annual advisory fee after that
- Three portfolio strategies available through Digital Advisor: all-index, active/index, and ESG
- Vanguard Personal Advisor® offers access to a team of financial advisors starting at $50,000; dedicated CFP access available at $500,000 through Personal Advisor Select®
- Vanguard 529 Plan helps you save for college early on
- Excellent customer service with phone and email access Monday through Friday
Cons
- $20 annual service fee for IRAs and brokerage accounts (waived at $50,000 in qualifying assets or with paperless statements)
- Vanguard Digital Advisor® requires $100 minimum to enroll and charges approximately 0.15% net advisory fee after 90-day trial
- Digital Advisor portfolios invest only in Vanguard funds (no access to third-party ETFs)
- Basic trading platform compared to competitors; limited research and data tools
- No cash management account
Once your account is open and funded, you can also choose from a number of different index funds, like an S&P 500 fund, a fund that tracks government bonds or a fund that tracks international stocks. Funds that track the S&P 500 are generally an effective way to earn a good return on your money over time. Historically, the average annual return for the S&P 500 hovers around 10% (before adjusting for inflation). Of course, past returns do not guarantee future gains.
Charles Schwab has funds that are straightforward options with no investment minimum. Expense ratios are also notably low.
Charles Schwab
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One® Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit
Fees
Fees may vary depending on the investment vehicle selected. Schwab One® Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract
Investment vehicles
Robo-advisor: Schwab Intelligent Portfolios® IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One® Brokerage Account, Schwab Global Account™, Schwab Organization Account and Schwab Trading Powered by Ameritrade™
Investment options
Stocks, bonds, mutual funds, CDs and ETFs
Educational resources
Schwab offers courses, educational articles, videos, and webinars for investors at every level, plus advanced screeners, research tools, and market insights through the Schwab Center for Financial Research.
Terms apply.
Pros
- $0 minimum deposit for active investing
- No commission fees for stock and ETF trades; no transaction fees for over 4,000 mutual funds
- thinkorswim® trading platform offers advanced charting, strategy testing and multi-device access
- Robo-advisor Schwab Intelligent Portfolios® available with no advisory fee or commissions
- Access to on-demand advice from Schwab investment professionals
- Nearly 400 brick-and-mortar branches across the U.S. for in-person support
Cons
- $5,000 minimum required for Schwab Intelligent Portfolios® robo-advisor
- $0.65 fee per options contract
- Tax-loss harvesting only available on balances of $50,000 or more within Intelligent Portfolios®
- High cash allocation requirement in Intelligent Portfolios® may limit returns compared to competitors
For an option with no expense ratio whatsoever, consider what Fidelity offers. The brokerage has funds that track large-cap stocks, which the website says, "are considered to be stocks of the largest 500 U.S. companies based on float-adjusted market capitalization."
Fidelity Investments
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go® account, but minimum $10 balance for robo-advisor to start investing.
Fees
Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over, which includes access to unlimited 30-minute coaching calls with a Fidelity advisor and tax-loss harvesting on taxable accounts).
Bonus
None currently. Check Fidelity's promotions page for the latest offers here.
Investment vehicles
Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA®
Investment options
Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares
Educational resources
Extensive tools and industry-leading, in-depth research from 20-plus independent providers
Terms apply.
Pros
- No commission fees for stock, ETF, options trades
- No transaction fees for over 3,400 mutual funds
- Fidelity Go® portfolios use Fidelity Flex® mutual funds with zero expense ratios
- Human advisors manage day-to-day Fidelity Go® portfolio decisions
- Unlimited 30-minute coaching calls with a Fidelity advisor for accounts of $25,000 and over (at no extra cost)
- Tax-loss harvesting available on taxable Fidelity Go® accounts with $25,000 or more
- Abundant educational tools and resources with research from 20-plus independent providers
- 24/7 customer service
- Over 100 brick-and-mortar branches across the U.S. for face-to-face support
Cons
- Fidelity Go® has a 0.35% advisory fee per year for balances of $25,000 and over
- Fidelity Go® invests only in Fidelity Flex® mutual funds (no third-party ETFs or individual securities available)
- No socially responsible or ESG portfolio option through Fidelity Go®
- Some of Fidelity's mutual funds require reaching specific thresholds
- Reports of platform outages during heavy trading days
If you do want to trade meme stocks
For those still itching to trade the next viral stock, invest only with money you can afford to lose. Before you invest, you should make sure you already have an emergency fund set aside, you've paid off your high-interest debt and you're already contributing to a retirement account (and meeting any 401(k) employer match, if applicable).
When you're ready to buy stocks, you first need to open a taxable brokerage account. Robinhood* and Webull are two popular trading platforms for active investors, boasting easy-to-use mobile investing apps. Plus, they offer IRAs (traditional, Roth and rollover) so users can manage their retirement funds along with their stocks all in one place.
Robinhood
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum required to open an account or to start investing
Fees
Fees may vary depending on the investment vehicle selected. Commission-free trading; regulatory transaction fees and trading activity fees may apply
Bonus
Get a free stock added to your brokerage account when you link your bank account and fulfill the promotion conditions (keep it or sell after 2 trading days)
Investment vehicles
Brokerage account: Robinhood Financial commission-free investing
Investment options
Stocks, ETFs, options, fractional shares, IPOs, and select cryptocurrencies Robinhood Crypto (availability varies by location)
Educational resources
"Investing basics" blog, an online library of content and Robinhood Snacks newsletter
Terms apply. *(Review Robinhood disclosures here.)
Pros
- $0 minimum deposit to open an account and start investing immediately
- Commission-free trading on stocks, ETFs, options and crypto
- Get a free stock just for linking your bank account
- Access to fractional shares (own a piece of stock for just $1)
- Beginner-friendly app with built-in educational content
Cons
- No human advisor or managed portfolio option
- Fees outside of commissions may apply
Webull
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum required to open an account or to start investing
Fees
Fees may vary depending on the investment vehicle selected. Commission-free trading on stocks, ETFs and options; regulatory transaction fees, exchange fees and options contract fees may apply.
Bonus
Rotating welcome promotions, including free stock awards and deposit match bonuses of up to 4% on qualifying deposits. Premium subscribers ($3.99/month or $40/year) also earn a 3.5% match on IRA contributions.
Investment vehicles
Brokerage account: Webull commission-free investing IRA: Traditional, Roth, Rollover IRAs Robo-advisor: Webull Smart Advisor
Investment options
Stocks, ETFs, options, fractional shares, IPOs, ADRs, OTC stocks, futures, US Treasuries, bonds and select cryptocurrencies through Webull Crypto
Educational resources
Webull offers educational resources, including beginner guides, advanced trading strategies and a paper trading simulator to practice risk-free with virtual funds.
Terms apply.
Pros
- $0 minimum deposit to open an account and invest
- Commission-free trading stocks, ETFs, and options
- Advanced charting tools with 50+ technical indicators
- Extended trading hours available 24 hours a day, Monday through Friday, on select securities
- Paper trading simulator lets you practice strategies risk-free before investing real money
- Wide range of investment options including futures, bonds and crypto
- Access to tax-advantaged IRAs with a 3.5% contribution match through Webull Premium
Cons
- Self-directed platform (users are responsible for their own investment decisions with limited guidance)
- No mutual funds available
- Limited account types (no joint, custodial, trust or HSA accounts)
- Educational tools are limited compared to full-service brokerages
Both companies also allow investors to buy fractional shares of stocks, so you can buy a piece of the action without getting in too deep. Experts generally suggest keeping individual stock picking limited to 5% to 10% of your overall investment portfolio.
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*(Review Robinhood disclosures here.)
