What is a Meme Stock?
Unlike traditional stocks, the value of a meme stock is often detached from its underlying financial performance, earnings, or business fundamentals, and its share price can quickly become overvalued.
Key Characteristics of Meme Stocks
Meme stocks are typically characterized by:
- Social media hype. Meme stocks become popular as mentions, discussions, and promotion of them increase on social media platforms. Online communities such as Reddit’s WallStreetBets group have been instrumental in driving the popularity of meme stocks as members become motivated by FOMO.
- Volatility. Meme stocks are known for their extreme price volatility. The value of these stocks can skyrocket and plummet within days or even hours in response to the actions of retail investors.
- Retail investor dominance. Unlike traditional stocks, meme stocks are primarily influenced by individual retail investors rather than institutional investors or financial analysts. These retail investors are often attracted by the opportunity to participate in a “movement” or to disrupt the traditional financial system.
- Short squeezes. Meme stocks are frequently the target of short squeezes. Short selling involves taking a short position on a stock with the expectation that the price will fall. Retail investors can collectively drive the price higher by buying and holding the stock, forcing short sellers to cover their positions at a loss, which drives up the price further.
- Lack of traditional fundamentals. Meme stocks often have weak or even negative financial fundamentals, which is why they become targets for short sellers. In many cases, individual investors are drawn to these stocks purely because of the social media hype, without regard to traditional valuation metrics.
Examples of Meme Stocks
Several stocks have gained meme stock status over the years. The most notable examples include:
|GameStop (GME)||GameStop, a struggling video game retailer, became the most prominent meme stock in January 2021.
WallStreetBets users collectively bought large volumes of GME shares, causing a massive short squeeze that sent the stock’s price soaring by more than 1,600% before it crashed back down in February.
|AMC Entertainment (AMC)||AMC, a movie theater chain weakened by the Covid-19 pandemic, saw its stock price soar by more than 2,600% in the first half of 2021 as retail investors rallied behind it.
The company’s survival and stock price gains were attributed to investors “aping” into positions to drive up the price that allowed it to sell shares and raise funding to continue its operations.
|BlackBerry (BB)||BlackBerry, a former smartphone giant that now focuses on the Internet of Things (IoT) and cybersecurity software, also experienced a resurgence in early 2021 as retail investors targeted it as a potential meme stock.|
Stock Market Impact
Meme stocks have had a significant effect on the stock market. Their popularity has challenged the dominance of institutional investors and traditional market dynamics. The rise of meme stocks has drawn a significant number of retail investors into the market, giving them a sense of empowerment and the ability to influence stock prices.
Meme stocks inject unpredictability into the overall market, increasing price volatility and making it difficult for traditional investors to predict.
The surge in meme stock activity has prompted regulators to scrutinize the role of social media and online communities in stock trading, leading to discussions about potential regulations.
Meme stocks represent a new and unconventional force in financial markets, driven by the power of social media and retail investors.
While meme stocks have attracted attention by disrupting traditional market dynamics, they come with inherent risks because of their high volatility and detachment from traditional fundamentals.
Investors interested in meme stocks should approach them with caution and be aware of the speculative nature of these investments.