Meme Stock

Memes are the new way for people to express happiness, criticism, excitement, surprise, fear, and anxiety by sharing memes over social media platforms. The word ‘meme’ is taken from the Greek word ‘mimema’ which means imitation. Memes simply mean the imitated information spread via social media. Interestingly, the meme trend entered the Stock market, and the term ‘meme stocks’ was born.

This article spotlights meme stock meaning, which was the first meme stock, and how they work.

What is Meme Stock?

Meme stocks are not a separate class of investment. Rather, they are the recently emerged vernacular, in the year 2020, in the stock universe. Meme stocks refer to those particular stocks that soar in price and have unusually high trading volume due to buzz over social media. These are the stocks that often get the hype based on memes shared among the traders on social media platforms like Twitter and Facebook, or become a ‘matter of talk’ on platforms like Reddit, StockTwits, and so on. Due to popularity in the social media community, meme stocks often end up being overvalued relative to their fundamentals. They stay up in price till the meme community keeps showing interest.

These stocks are highly speculative and extremely volatile. Sometimes, the meme stock price rise in a few days is higher than the growth of regular stocks over years. The price of these stocks can drop rapidly, too. The reason is the prices are climbing up more often due to short-term hype, instead of their performance. However, the chances of stock surviving at this price for the long term are rare. Therefore, such stocks are considered highly risky.

It is not advisable to invest more than 5-10% of an investor’s portfolio exposure in such stocks. An investor can invest in meme stocks in a similar way to investing in other stocks, by putting a buy order through an online stock broker like IIFL Securities. Investors can get invested in meme stocks through an ETF, too.

Meme stocks are like a coin with two sides. Here are the pros and cons of meme stocks.

Pros

• Meme stocks can offer high potential returns in a short period, especially to the early trend capturer.
• Investors can earn high short-term returns just by riding a trend, without much research.

Cons

Investing in meme stocks is more like betting on risky investments. The trend may not survive longer.

Predicting the point from which the trend can be reversed is tough. Not exiting at the right time may cost huge money to the investors.

Example

ITC is one of the most-liked meme stocks in India. Even after being a conglomerate with a presence of over 100 years, the stock price didn’t show significant movement. The shareholders were not sure about whether they should hold it or exit. When comparing the price for five years, it was trading at Rs. 211.80 on 6th May 2016 and at rs. 212.60 on 17th May 2021. There is no such movement in stock price. Therefore, the stock started receiving criticism through memes over social media. This way the ITC stock became meme stock. In April 2022, the stock spiked and hit its 52-week high.

GameStop: The First Meme Stock

The GameStop Corp., an American gaming merchandise retailer, launched as the first meme stock. Keith Gill, a popular American financial analyst, and investor posted a video on YouTube, explaining why the shares of GameStop can spike to $50 per share from $5 per share. As a reason, he mentioned that the stock had a large number of short positions held by hedge funds. However, when the stock would move higher, these hedge funds would have to cover their positions. This can push up the stock prices

Afterwards, Ryan Cohen purchased a 10% stake in the company and joined the board on 12th January 2021, and the stock soared to $20 per share. In January 2021, the scenario Keith Gill explained came out as real. Numerous traders from Reddit’s WallStreetBets pushed up the price from below 20$ to about 500$ at a moment. When some traders did this as they saw a money-making opportunity, others ended up with panic buying. Consequently, some hedge funds end up bearing huge losses, whereas retail investors were highly rewarded. From this instance, the term ‘meme stocks’ was popularized by Reddit traders. After a year, the stock prices came back to normal.

How does Meme Stock work?

Meme stocks rally more due to social media hype than their performance or company fundamentals. When some traders catch an undervalued stock, they start buying it. Once more traders buy it, the trading volume of that stock increases significantly. When that stock becomes a popular one or starts gaining traction through memes in the social media community, its demand rises.

The more that stock gains interest, the more the demand, and ultimately its price, rise. When the price keeps rising, some of the investors end up buying it in FOMO - Fear Of Missing Out. This way such stock becomes a meme stock. Such meme stocks have the potential to get a drastic price hike of 25-30% overnight.

Once the price hikes sharply, the traders begin to sell it thinking the stock reached its peak. When more traders start selling it, the price begins to fall. If investors don’t sell at the right time, they are at a huge chance to lose a considerable amount of money.

To sum up, meme stocks show upward price movements at a particular time due to the buzz created by the social media community. When some find such stocks as a money-making opportunity, others ride the trend and end up buying due to FOMO. Predicting the price movement for such stocks is a difficult task. Investing in such stocks may give short-term gains, though, in the long-term it may prove risky.