What Are Meme Stocks?
The COVID-19 pandemic triggered a bizarre number of new trends, ranging from toilet paper hoarding to the rise of what’s become known as “meme stocks.” If you’re a newer investor, you may be curious about what meme stocks are and whether they’re worth investing in. We’ll break down the meme stock craze for you and clue you in on what you need to know when it comes to choosing whether to invest in or avoid them.
What is a “Meme Stock”?
Meme stocks refer to a type of stock that suddenly surges in value due to social media hype. Unlike traditional stocks, meme stocks don’t rise in price based on fundamentals, like sales or earnings. In fact, sometimes they’re actually shares of companies that are doing pretty poorly based on traditional standards.
Similar to stocks targeted by day traders, traders in meme stocks rely on volatility alone. As more and more investors get in on the hype, they all buy into the stock at the same time, collectively inflating its price. This can result in a substantial rise in a stock’s value within a short period of time.
The downside is that meme stocks tend to fall as quickly as they surge, making them very unpredictable and risky.
How are Meme Stocks Created?
Social media platforms such as Reddit, YouTube, and Telegram are the lands where meme stocks are hyped up. Usually, a group or user with a large following selects a stock to target and then spreads the news across the online world, urging everyone to buy into the stock at the same time. Many of the most popular meme stocks (such as AMC and Gamestop) are targeted specifically because they have abnormally high levels of short interest.
Short interest is generated when investors “short sell” shares of a particular stock that they believe will go down in value. These shorted shares are usually borrowed from the investor’s broker, with the plan being to buy them back at a lower price once their value drops and keep the profit.
When meme stock investors target such a stock, they create what’s known as a “short squeeze.” Basically, this means that they drive the price up instead of down, forcing short sellers to panic and buy back their stocks, often at a higher price than intended. This generates more buying, which only raises the value of the stock even more.
Are Meme Stocks a Worthy Investment?
First of all, never ask a stranger online this question. They’ll almost always respond with a resounding “yes!” whether it’s in your best interest or not. This is because meme stocks rely on a massive amount of people to buy into the stock at once in order to raise its value. The truth, however, is that meme stocks are only worth investing in for very short amounts of time and only if you understand exactly what they are and how to trade them.
Much like day or swing trading, profiting from meme stocks greatly relies on your ability to read charts and pinpoint the right times to both buy and sell. It also requires being in touch enough with social media to gauge when the stock will rise in value but immune from the massive amounts of peer pressure you’ll encounter to “buy and hold.”
Another important component is being able to tell whether a stock actually a good company that’s simply attracted interest among meme stock investors or whether it’s driven purely by meme stock hype. If it falls into the second category, then understand that it’s far from a sound long-term investment and should be approached with a very different strategy.
While some people do make money from buying and selling in the short run, almost everyone who holds a pure meme stock past a certain point is going to lose their gains when the stock’s popularity fades and its price begins to correct.
Top Meme Stocks Right Now
Due to their very nature, meme stocks are constantly falling in and out of favor. In order to find the meme stocks of the moment, it’s not a bad idea to follow WallStreetBets on social media to see which stocks are getting the most mentions. Meme stocks also tend to be pretty easy to spot, as they’re often in the “movers” or “most active” sections of many brokerage sites due to their high volume.
Some of the most popular meme stocks of the moment or recent past include:
Advantages of Meme Stocks
Among the biggest advantages of meme stocks are that they can be quite profitable if you fully understand what they are and how to play them. Due to the massive amount of volume they generate, they tend to be a day trader’s dream and can make you a lot of money in a short amount of time if you know how to identify when to buy in and when to cash out for a profit.
Additionally, meme stocks also involve a great deal of hype, so it tends to be pretty easy to figure out which ones are “trending” at the moment. Another, less fortunate advantage for experienced traders is that meme stocks tend to attract a large number of inexperienced traders who don’t fully understand what’s going on.
Many less-experienced traders will “hold” long after a meme stock’s short interest has dissipated, due to nothing more than the advice of others on social media. Sometimes the only thing more profitable than an actual short squeeze is millions of people who believe there’s one coming, even if the facts say otherwise.
Disadvantages of Meme Stocks
While meme stocks can be great for experienced traders, they can be disastrous for beginning traders who don’t understand what they’re getting into or why.
The average meme stock generates a huge amount of peer pressure to “buy and hold.” Usually, this advice is generated by more experienced investors looking to pull a pump and dump scheme. It then trickles down to the less experienced masses, who parrot the advice to others and shame anyone who doesn’t follow it.
If you do get into meme stock trading, take any advice you hear on social media with a grain of salt and trade solely based on chart patterns and indicators.
Key Identifiers of Meme Stocks
Meme stocks tend to share several key characteristics which should help you pinpoint them. Some of the most common include:
- A large amount of hype on social media platforms such as Reddit, TikTok, YouTube, Discord, and Telegram
- Large short interest. For this reason, some meme stocks are pretty terrible companies that would never have risen in value if not for the coordinated buying effort
- A huge amount of volume
- Large price swings in both directions
- A large amount of risk
- Online promises of an impending short squeeze and the wealth it will generate (often by inexperienced investors who don’t actually understand how a short squeeze works)
- Large amounts of peer pressure to “buy and hold”