Meme stocks are back. Here’s all you need to know about the term and what it brings to the stock market world.
Meme stocks have recently become a buzzword in the stock market world. The term made headlines in January this year after stocks of GameStop skyrocketed, all thanks to members of the Reddit forum r/wallstreetbets. The forum currently has over 10 million followers.
The shares of GameStop, a struggling US video game retailer known for selling video-game discs and cartridges, were as low as US$18.84 on December 31, 2020. However, driven by Reddit users, its shares went up nearly 1,700% by late January.
While GameStop became the face of meme stocks, many others followed suit. This included cinema giant AMC Entertainment, which was saved from imminent bankruptcy after Reddit users on r/wallstreetbets rallied to save it. #SaveAMC had also trended on Twitter.
Other meme stocks include former smartphone maker BlackBerry, and telecom firm Nokia. The meme stock rally has also increased revenue of stock trading app Robinhood which amassed at least $110 million from the rally.
While the initial meme stock mania lulled in the following months, last week witnessed a comeback. While GameStop Corp. rose 13% on Monday, May 17, AMC Entertainment Holdings Inc. closed 7.5% higher. The week before, AMC’s stock had already jumped 66%, marking its longest streak of growth in three years.
The latest meme stock trend seems to be driven by hashtag #SqueezeAMC that began trending on Twitter early last week. As the meme stock craze picks up again here’s a look at what it means and what it brings to the stock market world.
What are meme stocks?
Meme stock is a stock that sees significant increase in value after going viral on social media, grabbing the attention of individual or retail investors.
“The term “meme stocks” really comes from just the fact that it happened on social and that the majority of people sort of piled on in the end,” Jannick Malling, Co-CEO of brokerage app Public, told The New York Times.
Another example of social media raising the price of securities is the cryptocurrency Dogecoin, which is considered the meme stock of the crypto universe. Started as a joke in 2013, Dogecoin’s valuation rose by over 900% in 24 hours last month. The reason? Tweets by celebrities like Elon Musk and Snoop Dog.
How does a meme stock work?
Often, meme stocks’ prices are based on social media hype rather than the company’s actual business performance. This makes meme stocks unpredictable. Investors on social media can artificially increase stock prices, which is inevitably followed by a crash.
A meme stock’s price surge often starts when a bunch of investors, who believe the stock to be undervalued, start buying it in large quantities. This causes the stock’s price to slowly climb up.
It soon becomes popular due to the viral nature of social media. In the case of GameStop, while Reddit users were largely behind its surge in popularity, backing by celebrities also played a role. For instance, on January 27, Elon Musk tweeted, “Gamestonk!!” and linked to the subreddit. This caused a surge in buying, with shares going up by over 60% after his tweet.
The increased popularity means more people start buying stocks. Once the buying peaks, the earliest adopters start making profits by selling their stocks. Soon, similar to the buying craze, a selling craze follows, leading to a price drop.
As with any investment, meme stocks come with risks. For example, while GameStop hit a record high of $483 in January, its prices plunged to under $40 in February. This meant that many Reddit traders lost millions. Nevertheless, it climbed up again in the following week.
“There’s going to be people who’ve had significant losses, who bought it at the top—who had no idea what they were doing and only looked at it with zeal and probably some jealousy [of] wanting to get involved,” David Mazza, Managing Director at asset management company Direxion told Forbes.
“We live in an environment of populism where information spreads through smartphones and social media, where good situations can become bad very quickly,” Mazza added.
As meme stock investing often follow a social media trend rather than logical reasoning, many investors have even ended up buying the wrong shares. The January trading frenzy, for instance, caused an increase in trading mistakes among investors. One such example is with the GameStop stocks. With both GameStop and Australian mining stock listed as GME on the New York Stock Exchange, the latter saw a rise in trades.
The rise in retail investing
The meme stock mania has caused an uptick in trading activity among retail investors (non-professional investors buying and selling stocks through brokerage firms or savings accounts). Pandemic-induced lockdowns, brokerages offering commission-free trading, stimulus measures, and bullish market, have all played a role in this.
“So many more people are getting into the stock market through Robinhood and bitcoin, so everyone is now in on the jokes about flipping your stimulus money or Fed intervention sending stocks up,” said Lit, the Founder of financial meme maker Litquidity.
For instance, as of March 11, over 80% of 450 million shares of AMC are owned by over three million individual shareholders. The interest in retail investing grew so much so that the U.S. Securities and Exchange Commission (SEC) put out an alert to warn retail investors about the “significant risks of short-term investing based on social media.”
“It can be tempting to jump on the bandwagon and follow whatever the crowd seems to be doing,” it noted. “Sometimes, however, following the crowd may lead to significant investment losses.”
While few investors became overnight millionaires due to meme stocks such as GameStop, the success stories are rare. While it can be appealing to hop on the latest investment trends and make money, it is vital to do your homework and research before you make any investment decisions.
Without adequate research, investors won’t be able to assess if a stock is expensive or cheap, and will have to take a gamble. With more meticulous research, investors will be in a better position to gauge when to buy and sell stocks and understand how much risk they can take. Although losses are a part of stock trading, research can help investors make informed decisions.
Header image by Sophie Backes on Unsplash