Meme Stocks 101: Understanding the Market and Investing

Meme stocks have taken the market by storm, with some stocks experiencing wild price swings in a matter of days. Meme stocks are often small-cap or mid-cap companies that are heavily traded on social media platforms.

Investors have been drawn to these stocks for their potential for high returns, but it's essential to understand the market and investing strategies involved. The rise of meme stocks can be attributed to the influence of social media and online communities.

These online communities, often referred to as "wallstreetbets", have been instrumental in driving up the prices of meme stocks. The group's collective buying power has been a significant factor in the stock price increases.

Broaden your view: Meme Stock Price

Meme stocks are a relatively new phenomenon that emerged in 2020 on the Reddit forum r/wallstreetbets.

The tone of WallStreetBets is unconventional and often irreverent, which sets it apart from other investing message boards.

Users on this forum work together to identify target stocks and promote them, while also putting their own money to work.

This approach is distinct from online pump-and-dump schemes aimed at defrauding investors.

Unlike those schemes, the promotion of meme stocks involves buying and holding stocks, even after the price spikes, with a strong and committed group of investors.

Worth a look: Wallstreetbets Meme Stocks List

Meme stocks are shares of companies around which online communities have formed to promote and build narratives. This phenomenon arose in 2020 out of the subreddit r/wallstreetbets.

A meme stock's price can skyrocket in a short period, often hours or days, due to a sudden surge in interest online or on social media. This is followed by buying among small individual investors.

GameStop (GME) is widely regarded as the first meme stock, whose price rose as much as 100 times over several months. This was largely due to a short squeeze crafted by its meme community.

These stocks carry an added risk of higher-than-normal volatility, which can be driven by viral posts on various social media platforms.

Meme stocks skyrocket in price in a short period, often hours or days, due to a sudden surge in interest online or on social media and subsequent buying among small individual investors.

These short-term surges can often reverse course just as quickly, making meme stocks far more volatile than average stock market moves.

A meme stock is a shared investing idea imitated by other investors, spread via pop culture references on social media.

Meme stocks tend to take off like a rocket ship, going straight up until they don't, and then coming straight down, because it's based on social-media hype.

Here's a breakdown of the key factors that contribute to the volatility of meme stocks:

The price of a meme stock can really be divorced from those fundamental valuations: earnings and what the future might bring.

Short selling is a bet that a stock's price will go down. It involves selling shares that you don't own, hoping to buy them back at a lower price.

To sell shares short, you need to borrow them from someone who owns them. This is known as short interest, and it's a common feature of meme stocks.

Meme stocks, especially early on, tend to be heavily shorted names. This means that a large proportion of the company's outstanding shares have been sold short.

You might like: How to Buy Shares in Stock Exchange

Short sellers must borrow shares to sell them, but as more and more shares are sold short, there are fewer shares left available to borrow. This can make it hard to short sell a stock, especially if it's a meme stock with a high short-interest ratio.

If a short seller can't borrow shares, they can't sell them short. If they're already short, they may be forced to cover their position by buying back the shares at a higher price. This can lead to a short squeeze, where many shorts are forced to cover at once and add upward pressure to the stock's price.

For another approach, see: How Do Shares Work in Stocks

Meme stocks began to gain traction in late 2020 and early 2021, thanks in part to online groups and communities developing an interest in select companies' shares.

The Corporate Finance Institute notes that commission-free companies like Robinhood and online investing groups grew during the Covid-19 pandemic, when many people were home and had additional funds from government programs.

Low-interest rates may have also contributed to some beginning trades, making it easier for people to invest.

Retail trading in meme stocks is facilitated by social media, specifically platforms like Reddit.com and the subreddit r/wallstreetbets.

The investment research and financial services firm Morningstar reported that meme stock investing was especially popular with younger investors who shunned traditional investing strategies.

GameStop (GME) was the gaming retailer that drew the most attention, with other meme-stock companies from the first wave including AMC (AMC), BlackBerry (BB), and Bed, Bath and Beyond.

In 2024, GameStop became a meme stock once again, thanks to a post by investor and financial analyst Keith Gill, also known as Roaring Kitty online.

The stock price of former President Donald Trump's social media company, Trump Media & Technology Group, surged on its first day of trading on the Nasdaq stock exchange, adding more than $1 billion to the company's value.

Meme stock investors are buying based on emotions, momentum, and the hope that something will drive the value of the stock higher.

A different take: Stifel Financial Stock

The herd mentality influences the price of the company, making it momentum-based speculation rather than basing decisions on fundamental value.

The YouTube persona Roaring Kitty posted a video in August 2020 laying out the case for why shares of GameStop Corp. (GME) could soar from $5 to $50 per share.

A few days later, the former CEO of Chewy.com and investor Ryan Cohen purchased an unknown amount of GME stock, which Gill acknowledged on Twitter.

In January 2021, the short squeeze that The Roaring Kitty had suggested earlier took place in earnest, with the price of GME shares exploding to nearly $500 amid a frenzy of short-covering and panic buying.

Explore further: Stock Price

Meme stocks can be a wild ride, but it's essential to understand what you're getting into. Meme stocks are actual stocks listed on exchanges and available for trade, but their price performance and appeal often have little to do with their fundamentals.

To build a diversified portfolio of meme stocks, it's crucial to consider multiple holdings with more than just a one-off chance of providing returns. This can help you catch a tailwind from various places and reduce your risk.

A company with great fundamentals, such as stable or growing revenue, healthy profit margins, and a solid balance sheet, can help sustain stock price growth. However, great fundamentals aren't required, and an actionable plan to improve financial results can also make a difference.

If a company has suddenly reached meme stock status and management has yet to comment, look for a business that can benefit from strong secular growth trends, such as technology. This can give you a better chance of long-term growth.

Meme stocks can be especially volatile, so it's essential to plan accordingly and be prepared to continue investing more over time. The old adage, "Don't put all your eggs in one basket", still rings true, even with meme stocks.

Here are some key factors to consider when investing in meme stocks:

Keep in mind that meme stocks tend to take off quickly, but then come crashing down due to social media hype. Investing in meme stocks can be a high-risk, high-reward strategy, but it's essential to be prepared for the potential downsides.

Investing in meme stocks can be a wild ride, but it's essential to understand the risks and rewards.

Meme stocks are often highly volatile, with prices fluctuating rapidly due to social media hype.

Investors can lose a significant amount of money if they're not prepared for the rapid price swings.

In some cases, meme stocks have seen price increases of over 1,000% in a short period, making them attractive to investors.

However, these gains are often short-lived and can be followed by significant losses.

Investors should be aware that meme stocks are often associated with companies that have weak fundamentals or are involved in questionable business practices.

This can make them more susceptible to regulatory scrutiny or even delisting.

Investors should carefully weigh the potential risks and rewards before investing in meme stocks.

GameStop's stock price fluctuated significantly in 2024, opening at $16.67 on January 2 and hitting a high of $48.75 on March 14.

AMC's stock price and trading volume saw notable changes, starting with a price of $6.21 and volume of 14 million on January 2, and peaking at $6.85 with a volume of 634 million on May 14.

Coinbase Global's stock price rose to a high of $275.71 on March 25, after starting the year at $156.88.

Meme stocks are often driven by emotions and momentum, as seen in the rapid price surges of companies like Trump Media & Technology Group, which added over $1 billion to its value on its first day of trading.

This phenomenon can be attributed to the herd mentality influencing the price of the company, making it a momentum-based speculation rather than a decision based on fundamental value.

GameStop's stock price fluctuation is a prime example of how meme stocks can behave. It opened at $16.67 on January 2, 2024, and hit a high of $48.75 on March 14.

AMC, a theatrical-exhibition company, saw significant price and trading volume changes. It started the year with a price of $6.21 and volume of 14 million on January 2, 2024.

Coinbase Global (COIN), a crypto-currency-exchange platform, also experienced notable changes. Its stock price began the year at $156.88, with 27 million in trading volume.

Here's a comparison of the notable meme stocks' year-high prices:

These examples demonstrate the unpredictable nature of meme stocks.

The rise of meme stocks has had a significant impact on the market, as seen in the case of Trump Media & Technology Group. On its first day of trading, the stock price surged, adding over $1 billion to the company's value.

Investors in meme stocks are driven by emotions and the hope of making a quick profit, rather than a thorough analysis of the company's fundamental value. This can create a herd mentality, where prices are influenced by the actions of others.

The market can be volatile as a result of meme stock investing, with prices fluctuating rapidly in response to changing sentiment. This can lead to significant losses for investors who are not prepared for the risks involved.

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Social media activity is the main driver of the prices and trading volumes of meme stocks, as noted by Britannica Money. The hype of meme stocks is generally not based on changes in the underlying company's fundamentals of financial performance, but in messages on social media.

Meme stocks like GameStop are publicly traded equities whose stock price is heavily influenced by social media. This means that the price performance of a meme stock is generally not based on the company's underlying fundamentals.

The hype on platforms like Reddit can cause spikes in demand, leading to exceptionally volatile prices and trading volumes of meme stocks. This is a key characteristic that sets meme stocks apart from traditional stocks you may invest in.