The surge in popularity and trading volume of “meme stocks” on Wall Street in recent years can be attributed to their viral character on social media and online forums.
These erratic equities, which range from GameStop (GME) to AMC Entertainment (AMC), have drawn interest from both financial markets and individual investors. However, what are meme stocks precisely, and is it a smart financial decision to invest in them?
Important lessons learned
- Meme stocks are frequently fueled by social media and retail investor forums, and they are distinguished by their speculative nature and viral popularity.
- Memes carry a high danger of huge losses along with their great volatility, despite the possibility of quick rewards.
- Concerns about meme stock trading have been voiced by regulators, who point out possible legal and commercial repercussions.
- Divergent opinions are expressed by specialists and financial analysts regarding the viability and prudence of investing in meme stocks.
Comprehending Meme Stocks
Following the GameStop trading frenzy in early 2021, the phrase “meme stock” made its way into the investment vocabulary. On the other hand, the idea of equities experiencing an abrupt surge in trading volume and popularity due to online investor forums and social media buzz is not as new.
The emergence of commission-free trading platforms like Robinhood (HOOD) and the increasing sway of online forums like Reddit’s r/WallStreetBets are responsible for the meme stock phenomenon. Due to lockdowns during the pandemic in 2021, many people stayed at home, so the time and free trades that were available laid the stage for what happened next.
In the past, meme-like traits have been seen in stocks like Tesla (TSLA) or cryptocurrency assets like Bitcoin, with their prices frequently influenced by opinion on social media and online conversations. On the other hand, meme stocks gained widespread recognition after the GameStop scandal in early 2021.
The shares of GameStop, a faltering physical video game shop, shot up to several hundred dollars per share in a couple of days in January 2021. Activity on the r/WallStreetBets subreddit, where individual investors united to buy the stock in bulk and stifle short sellers who had bet against the company, was the main catalyst for this extraordinary surge. Regulators, worried that these sites had encouraged trading during the frenzy, later investigated a number of trading platforms.
What Makes a Stock of Memes?
Several essential traits that have come to characterize meme stocks were brought to light by the GameStop phenomenon:
- Viral popularity: Messaging applications, social media sites, and internet forums are the main sources of growth for meme stocks. Retail investors are attracted to these equities due to the rapid spread of buzz surrounding them.
- Collective action: Meme stock buyers and sellers frequently work together to arrange purchases and sales, fostering a feeling of community and purpose. Market volatility, herding behavior, and large price movements can result from this collective action.
- Disconnect from fundamentals: The core fundamentals of the company are frequently not well reflected in the prices of its stocks. Rather, social media mood, FOMO (fear of missing out), and the possibility of quick returns are what drive trade.
- High percentage of shares in several popular stocks are sold short, indicating that investors are placing bets on the possibility of stock prices falling. This is known as large short interest. A phenomena called a “short squeeze” may be exacerbated by this significant short interest. In a short squeeze, short sellers are compelled to repurchase shares in order to cover their holdings, which raises demand and ultimately drives up price.
- High volatility: Memes are renowned for having wildly fluctuating prices, frequently exhibiting sharp drops in between abrupt increases. The speculative character of the investments and the investors’ emotional responses are what drive this volatility.
AMC Entertainment, BlackBerry, and Bed Bath & Beyond (BBBY), among other stocks, have all been engulfed in the meme stock craze since the GameStop event. The phenomena has brought attention to how social media is influencing financial markets and how ordinary investors are becoming more and more influential.
The Factor of Trolls
It’s important to emphasize that a combination of populism, disobedience of the establishment, sarcastic detachedness, and sheer entertainment value—that is, trolling—are at the core of the meme stock phenomenon. Participating investors may purchase particular stocks not just for the chance to profit, but also to defy conventional wisdom, chastise short sellers, or just enjoy the stock’s fascinating story.
In the case of BlackBerry, for instance, it’s possible that some investors were lured to the stock as a humorous means of endorsing a business that had virtually vanished from the smartphone market. Retail investors rallied around BlackBerry stock despite the firm’s sharp slide from its Obama-era prominence, in part because they saw the humorous potential of backing a company whose products were seen as antiquated relics. The meme stock phenomena is made even more unpredictable by this troll-like conduct.
Which Five Meme Stocks Are the Best?
GameStop, AMC Entertainment, Bed, Bath & Beyond (BBBY), BlackBerry, and Nokia (NOK) have been the leading meme stocks.
For various reasons, other stocks like Tupperware (TUP), Tesla (TSLA), Robinood (HOOD), and Coinbase (COIN) have also been engulfed in “meme” bubbles.
Do Memes Have Legal Status?
Indeed, meme stocks are shares of real companies, even though their underlying business models might not always be in such good shape. As long as there is no fraud, insider trading, or market manipulation, trading meme stocks is entirely legal.
Exists an ETF for meme stocks?
No. With the ticker MEME, the ETF provider Roundhill launched a meme stock exchange-traded fund in 2021. However, due to significant losses and decreasing investor interest, the fund was closed two years later, in 2023.
The Bottom Line
For investors seeking extreme thrills, trading meme stocks is similar to riding roller coasters. However, as with extreme theme park rides, it is not advised for people who lack the stomach or financial resources to partake in such trading. These stocks can have a welcoming community and the allure of rapid returns, but they are very dangerous due to their inherent volatility, lack of fundamentals, and manipulation potential.
Memes stocks may present opportunities for excitement and quick profits for investors who have extra money to invest, a high risk tolerance, and a keen eye on the market. This strategy does, however, necessitate a thorough comprehension of market dynamics, precise timing of entries and exits, and a readiness to assume the possibility of substantial losses. Memes are not a smart investment for the majority of investors, especially those with longer-term objectives like creating wealth over time or investing for retirement.
