Meme Stocks – History, Working, Pros and Cons
Between 2021 and 2022, investors, especially online retail traders joined hands to shoot up the prices of a few select stocks. These stocks garnered a fair amount of attention and cult-like following on social media, attaining the status of meme stocks. However, due to the lack of business fundamentals, meme stocks are subject to high price volatility.
This blog will help you understand the pros and cons of meme stocks, top meme stocks to check out and how to invest in meme stocks.
Meme Stocks Meaning: What are They?
Meme stocks are stocks that have a cult-like following based on the hype created by investors on social media and online platforms.
Investors, especially retail online traders have elaborate discussions on select stocks on online platforms building a hype around these stocks.
A meme stock quickly jumps in popularity and price due to unwarranted online attention. One of the common examples of meme stocks includes GameStop (GME).
History of Stock Market Memes
The meme stock history dates back to August 2020, when a Reddit subreddit, WallStreetBets, shared a video online explaining GameStop’s plans to revamp its business model and how the company’s stock could jump from $5 per share to $50 per share. The video also explained how hedge funds held short positions of the stock and were awaiting a price drop in GameStop’s stock and aimed at selling them for higher profits.
Users on WallStreetBets understood the shorting of stocks and began using Robinhood for trading the stock, which led to high volatility in the stock. As a result, many investors started buying GameStop stocks, making it extremely expensive for the hedge funds to buy back stocks from their short positions.
Many hedge funds lost millions of dollars since they could not close their short positions after the stock’s price rose to $500 per share while there was a minimal supply of the stock in the market.
Also Read: What Are FAANG Stocks – How Can You Invest in Them?
How Does Meme Stock Work?
The value of meme stocks as valuable assets stems from the masses’ online attention and cult following. Popular Reddit threads like WallStreetBets influence the prices by coordinating the buying and selling of stocks.
Meme stocks can maintain the spike in their value with online support regardless of the company’s performance, profitability, and underlying fundamentals.
The online hype and the viral component are the primary factors increasing the value of meme stocks in the market. The increase in stock prices is directly proportional to how well the online community reacts and interacts with the memes centred around it.
Meme stocks can witness a price rise of 30% to 50% overnight. When reversed, the short-term increase in the meme stock price leaves the majority of the meme stocks more volatile and even prone to crashing.
Eventually, the buzz in the investment community often leads to panic buying regardless of the market conditions.
Phases of a Meme Stock
Listed below are the phases of a meme stock cycle. The phases define how retail investors evaluate, invest, and use meme stocks.
1. Early Adopter Phase
The phase comprises traders who believe that a certain stock is undervalued and start buying them. It significantly increases the trading volume and the price of the stock.
2. Early Interest Phase
In this phase, investors notice the increase in trading volumes of particular stocks and start investing in them. It leads to a significant increase in the meme stock price.
3. FOMO Phase
The FOMO or the phase of fear of missing out, occurs when investors worry that they will miss out on the opportunity to buy a potentially profit-making stock at a time when their prices are surging.
This FOMO is due to the hype on social media and online forums. Consequently, they purchase equities based on online attention.
4. Flash Selling/ Profit-booking Phase
In the last phase, investors sell these meme stocks at their peak prices to maximise profits. It is the point at which the stock prices spiral downwards since many investors start pulling money out of these stocks out of the fear of losing money.
7 Popular Meme Stocks
The popular meme stocks list comprises the following meme stocks:
1. GameStop (GME)
American video game and electronics retailer GameStop is regarded as the first meme stock. According to the Guardian Newspaper, its stock price rose more than 10,000% from $3.25 in April 2020 to $347.50 in late January 2021.
2. AMC Entertainment (AMC)
Shares of AMC Entertainment Holdings Inc. (AMC) went from around $2 to a meme-stock mania high of roughly $60 in June 2021.
3. Bed Bath & Beyond
Bed Bath & Beyond has been struggling with its home-goods business for a long time. However, recently the company was labelled as one of the hottest stocks on Wall Street as a part of the meme stock mani.
4. Nokia (NOK)
Nokia’s depleting business is not unknown to most. However, the struggling company joined the meme stock bandwagon in early 2021 when its stocks rallied from $3.87 to $6.55, nearly doubling in value.
5. Blackberry (BB)
In 2021, Reddit users shifted their attention to BlackBerry to make it the next meme stock. The share price automatically shot up sending Wall Street into a frenzy.
6. Palantir
Until a few years ago, Palantir was a company nobody knew about, till it became a meme stock. The stocks shot up from $7 to $25.
7. Virgin Galactic (SPCE)
The first commercial space-liner in the world, Virgin Galactic, went on the stock markets in early 2020 and soon became a meme stock. The stock price went from $12 to almost $44 by the end of February 2020.
Pros of Meme Stocks
Listed below are the primary benefits of investing in meme stocks:
1. High Returns Potential
The top meme stocks carry potential high returns. The sudden massive spike in their prices during a short period presents retail investors with excellent opportunities to maximise profits with a quick turnaround time.
2. Opens a New Investment Opportunity
A meme stock is also an excellent opportunity for retail investors to get an ownership stake in a new, promising investment and stay ahead of the market.
Cons of Meme Stocks
Despite the popularity of meme stocks, they carry high risks, including the following:
1. Volatile
Meme stocks experience an artificial surge in demand and prices. It makes them highly unpredictable and their prices quite volatile. The prices can increase abnormally in a short duration, making them extremely volatile and risky for traders.
2. Built on Hype
A meme stock gains popularity due to social media hype where a company’s fundamentals, profitability, and performance do not play a significant role in the demand and supply of meme stocks.
What Is a Meme Stock ETF?
When you invest in a single stock, it’s usually riskier compared to when you invest the same amount in a basket of different stocks that track the same underlying index. This facilitates diversification of your money across multiple investment vehicles and can help you safeguard your investments in case a single investment does not yield results as expected.
A meme stock ETF is less risky as compared to holding a single stock. However, it’s still composed of high-risk investments whose values are as prone to skyrocketing as they are to plummeting.
You can invest in a meme stock ETF through the Roundhill exchange-traded fund MEME. This is a U.S-based meme stock ETF and its top holdings include Novavax, Roblox, Gamestop, Pinterest, Robinhood Markets, Coinbase, Doordash, etc.
Things to Know Before Investing in Meme Stocks
If you want to keep pace with the social media trends and want to invest in meme stocks, you must keep the following points in mind.
- The fear of missing out can lead you to risk more than your financial situation allows you to. Before you invest in a meme stock, you should ensure that you have a high risk appetite.
- Avoid relying on social media-led hype, but consider company fundamentals, including performance and profitability. You must assess whether the company is legitimate and has the potential to grow in the future. Furthermore, you should also analyse whether the investment matches your financial goals and investment horizon.
Also Read: What Are Multibagger Stocks And Why Do People Invest in Them?
Final Word
The trend of meme stocks will continue to gain popularity as social media becomes more influential in every aspect of human life. Investors can diversify their portfolios by trading them, but they should be aware of the risks involved.
FAQs
Ans. Meme stocks can be a good long-term investment only when the company is performing well and making significant profits. In that case, the social hype acts as an added advantage and not just a factor contributing to an artificial hike in prices.
Ans. A meme stock is called so because the share of a company has gained popularity and cult-like following through different social media platforms, particularly Twitter and Reddit where memes play a significant role.
Ans. There are a lot of risks associated with meme stocks. These are mostly traded by retail investors seeking the next big thing. Furthermore, a meme stock is subject to large, unpredictable swings based on social media hype, online discussion boards and forums.
Ans. Rather than increasing in volume because of the company’s performance, meme stocks rise in volume because of social media buzz and online forums, such as Reddit. Consequently, these stocks often become overvalued, seeing dramatic increases in price over short periods of time.
Ans. In the first few months of 2021, meme stocks propelled formerly unloved, and mostly unprofitable, names like GameStop to new heights. On January 28, shares of GameStop surged over 2000% to $483, a short-lived record-high stock price for the game retailer.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
