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For investors, 2021 has been a turbulent year. With tech stocks far from all-time highs and the Wall Street BetsTeam on a relentless mission to punish Hedge Funds and Institutional Investors, a new “category” of stocks has emerged – meme stocks.
Instead, Gamestop, AMC, Clover Health, and Blackberry, to name a few, are skyrocketing as individual investors pour money into these stocks.
But what is a meme stock? Read on to find out what a meme stock is, how they got started, and what it means for the future.
What Is a Meme Stock?
Twitter, YouTube, Reddit, and other Social Media Platforms embrace and love memes. The meme culture thrives on Twitter and Reddit specifically but is also shared in group messages.
No one can define the term “meme” as it is used in various contexts, but in its purest form, a meme is an image or video that portrays a concept or idea. This visual is then shared across social media platforms, group messages, and forums.
Iconic memes proliferate due to the “network effect,” thank you, Jack Dorsey and Mark Zuckerberg. In a matter of days, a meme can be seen by billions of users and become a buzzword in our everyday lives.
It is important to note that meme stocks should not be categorized as growth, dividend, or value stocks. Some equate meme stocks to gambling. That said, all meme stocks share similar characteristics:
- Driven by FOMO (“Fear of Missing Out”)
- Loved by Gen Z and Millennials
- Meme Stocks carry a varying degree of “hype”
- Meme Must be Inherently Funny
- The Stock Needs to Have Short Interest
The valuation around meme stocks is not derived from fundamental or technical analysis. In fact, most investors in meme stocks won’t acknowledge valuation as it is not part of their narrative or investing thesis.
The rise of meme stocks and their impacts on the global market should not be taken lightly. Meme stocks scare Wall Street and institutional investors alike.
And with social media platforms becoming an integral part of our everyday lives, it is safe to say that meme stocks will be around for years to come. So, buckle up and enjoy the volatile ride.
>> See: 9 Best Meme Stocks
How Did Meme Stocks Get Started?
It seems like meme stocks gained popularity overnight. However, this is not the case. Meme stocks were born thanks to technology, commission-free trading, and virality.
Robinhood and Webull paved the way for commission-free trading. This game-changing development forced the broader financial industry to pivot their business models and offer commission-free trading to their customers to stay relevant.
Commission-free trading has onboarded a whole new class of investors – everyday Americans. Investing is no longer a game only the wealthy can partake in. Investors can get started with as little as $1 and buy fractional shares of a company.
100 years later, financial technology companies are democratizing the stock market and making it accessible to everyone.
Commission-free trading platforms are the infrastructure of meme stocks. Think of them like cars. Investing communities and forums on Stocktwits, Reddit, and Twitter are the gasoline. They power meme stocks and propel valuations to disturbing levels.
Let’s look at some cold-hard data. Wall Street take notes.
- Stocktwits touts 7.5 million Monthly Visits (data from Ahrefs)
Stocktwits is like Twitter; users can “follow” stocks, create various watchlists, and post under the stocks of their choosing.
This allows popular users to drive investing narratives, spook others, or encourage investors to buy more and hold on for deal life.
- Subreddit r/Wallstreetbets currently has 10.5 million Degenerates (Engaged Followers)
- Subreddit r/Options has 777,000 Members
- Subreddit r/Stocks has 2.8 million active investors/traders
- Subreddit r/Stock_Picks has 102,000 members
While these are just four popular investing forums on Reddit, there are literally thousands of communities on the platform dedicated to investing and trading stocks.
Here is how the famed r/Wallstreetbets community describes themselves, “a community for making money and being amused while doing it. Or, realistically, a place to come and upvote memes when your portfolio is down.”
These communities can rally behind stock positions and drive a price either up or down. This power and lack of regulation is what spooks institutional investors.
They no longer control the narrative or share price. Instead, a group of everyday Americans finally have the power to (positively and negatively) influence the stock market.
How Do Meme Stocks Work?
Meme stocks go through five phases of development. Each phase is equally important and contributes to the sharp rise and fall of targeted stocks. It is important to note that these price swings are artificial.
They do not reflect the company’s actual performance but instead are fueled by the investor communities on Reddit, StockTwits, Twitter, and YouTube.
- Identification Phase: Investors actively search for “undervalued” stocks or equities experiencing downward pressure from large short positions.
- Rally the Troops: With the information gathered and subpar research conducted, investors aggressively rally fellow investors on forums. Together, they can fundamentally shift the price of a stock.
- Virality: Massive price swings garner attention from the media. For the most part, they are absolutely perplexed at the phenomenon taking place. Over on CNBC, you can see Andrew Ross Sorkin, Jim Cramer, Sara Eisen, and Joe Kernen covering the price movements in real-time and trying to uncover the underlying reasons that led to the stock being targeted. This phase further spreads the meme stock and leads to the next phase.
- Fear of Missing Out (FOMO): Everyone is talking about the meme stock at this point. From Wall Street to the burgeoning communities on Reddit, the meme stock is becoming a household name. This encourages more retail investors to join the fun and buy the stock.
- Crash & Burn: Early investors recognize they are sitting on a 100%+ gain and begin to take profits off the table. As investors unload positions, the share price finally returns to equilibrium rapidly, leaving late investors in a painful position.
Since last winter, this cycle has rewarded early investors and punished those late to the party or investors with large short positions.
Moreover, this cycle is quick. Unless you routinely scan the subreddit communities, it is often too late to join the fun and make money.
>> More: How to Research Stocks
How Have Meme Stocks Changed the Stock Market?
For the broader financial markets, meme stocks will have little impact. However, for Hedge Funds that actively short stocks based on fundamental analysis, this movement is certainly worth paying attention to.
Investment tools that reveal short positions make it easy for investing forums and investors to pinpoint specific stocks ripe for a beautiful short squeeze. It is not illegal for a group of investors to coordinate a short squeeze. Nothing is protecting a hedge fund’s position.
That said, Wall Street has deep pockets, so investors should be on the lookout for regulation. I wouldn’t be surprised to see a massive lobbying effort come to fruition that severely limits the influence of subreddit communities and investing forums.
Not sure how they would isolate or regulate these internet communities, but it will certainly be interesting to see what the SEC and institutional investors come up with.
Should You Invest in Meme Stocks?
Ultimately, the decision to invest in a meme stock is yours. Prudent investors should be wary of volatility, the lack of fundamental analysis, and the cash & burn effect.
Investing in meme stocks only rewards a handful of investors and annihilates the rest. It is impossible to time the stock market. Here is my question to you.
Would you rather invest in a meme stock or hit the local casino and throw money down on black?
What Are Some Examples of Meme Stocks?
It seems like every other day, there is a new meme stock. However, a few meme stocks stick around for the long haul and have garnered so much media attention that it is impossible to forget.
Here are some popular meme stocks throwing Wall Street a curveball:
- GameStop (NYSE: GME)
- AMC Entertainment Holdings Inc (NYSE: AMC)
- Lemonade (NYSE: LMND)
- Clover Health (NYSE: CLOV)
- Robinhood (HOOD)
Bottom Line: What Is a Meme Stock?
The rise of meme stocks is nothing short of fascinating and disturbing. The pure chaos and buzz around meme stocks are what makes them exciting to watch and talk about.
As we move forward, investors should continue to monitor the development and take note of the broader impact it has on the financial ecosystem. Only time will tell. Until then, diamond hands.
This article is for informational purposes only. It is not intended to be investment advice.