What is a Meme Stock?
Meme stocks are risky and volatile equities that grow from social media hype. This guide explores what meme stocks are and whether they are worth investing in.
Originally published on Zinvest: zvstus.com/blog/what-is-a-meme-stock
Meme Stock Defined:
“Meme stocks” are phrased as highly volatile equities driven and fueled by social media hype, resulting in high-risk, high-reward investments. Rather than thriving through a company’s performance, meme stocks rise and spread through word of mouth.
Introduction
What are Meme Stocks?
Popular with younger adults, a meme stock is a phrase for shares of publicly trading companies that have popularized thanks to social media. These equities have existed in the stock market, and any particular stock can become a meme stock.
Because meme stocks tend to have an unpredictable nature, they’re viewed as bad for long-term investments. There’s hardly any investment research for a meme stock as the stock price constantly fluctuates, and its foundation centers around speculation.
However, the unprecedented hype surrounding these stocks, along with their potential viral nature and rapid growth, has allowed traders to cash out heavily in the short term.
For example, AMC began 2021 trading around $2 per share. It peaked at roughly $19.90 per share in late January, driven by social media success.
As with other meme stocks, the high volatility caused its stock price to drop back down to an average of $10 until once again, spiking to an all-time high of $62.55 per share in early June (an over 3000 percent increase).
As of this article, AMC is now averaging around $40.01 per share.
Why Did Meme Stocks Work?
r/WallStreetBets Influence
Fueled by members of the Reddit community, such as r/WallStreetBets, these investors decided to flip the switch on large hedge funds that were shorting certain businesses.
AMC and GameStop were two prevalent names that caught fire on social media, inciting a bandwagon of newbie traders to partake in investing. Both of these companies had a tough year in 2020 due to the pandemic: AMC’s share price plummeted in 2020 as most of its theaters were closed, and GameStop was viewed as a struggling video game retailer with multiple locations closing.
As more retail investors join, mainly from fear of missing out (FOMO) on potential profit, the results prompted a short squeeze — an acceleration of a share’s price as short sellers bailout to cut their losses.
Social Media vs Hedge Funds
To further explain, large hedge funds were shorting declining businesses, such as GameStop; these short sellers were betting on drops in share prices to profit.
Short sellers profit by borrowing and selling stocks and repurchasing them at lower prices. The hedge fund intended to short these businesses that were performing poorly and capitalize off its decline.
Reddit members decided to dump their money into these same stocks, causing the overall stock prices to increase. Additionally, both experienced investors who wanted to make quick money and newer investors began to buy into meme stocks as well.
To cut back on potential losses from paying back its lenders, the hedge funds had to purchase these stocks at prices much higher than they were originally lent and sold, causing the stock prices to rise higher. The Reddit community intended to make the hedge fund lose money, and it worked.
Like AMC and GameStop, other businesses such as Nokia and BlackBerry began to trend as meme stocks as well, although not as prominently. Even cryptocurrency, which is viewed as riskier than common stocks, has played a role in meme stocks — notably, Dogecoin surging in recent popularity.
Are Meme Stocks Worth Investing in?
Simply put, you should not invest in meme stocks, or at least don’t center your entire portfolio on them. The high volatility of these stocks and how the share price fluctuates depends on what others are saying about it.
While there are chances to profit greatly, new investors should be wary. As opposed to other types of equities that allow for safer, long-term investments, trading meme stocks is much riskier (and akin to gambling).
Share prices can increase or decrease at any given moment, further emphasizing the high-risk, high-reward nature of these stocks. The previously mentioned cryptocurrency Dogecoin, as an example, posted 22 percent gains back in mid-May of a single tweet from Tesla CEO Elon Musk.
If you’re still interested in the idea of trading meme stocks, you can refer to this link. This site tracks how many times a meme stock is mentioned on the ever-growing subreddit that started it all (r/WallStreetBets).
We also have an article regarding AMC’s stock and if it’s still worth investing in, and how to invest in it.
Conclusion: Should I Invest in Meme Stocks?
Whether it’s worth investing in these equities depends on shareholders understanding the risk-return tradeoffs that accompany it. Social media plays an extremely large role in the value of these stocks, which is why they’re referred to as meme stocks.
Meme stocks became increasingly popularized with new investors trading from fear of missing out — along with the intent from the Reddit community members — allowing novice investors to make out like bandits while hedge funds that initially shorted these businesses lost out on large dividends.
Ultimately, investing in meme stocks should be viewed similarly to day trading. If you plan on adding some into your portfolio, intend on it being an extremely short-term decision.
