What Does Meme Stock Means?
When you’ve been paying attention to financial news this year, you’ve almost certainly heard of a “meme stock.” A meme stock is one that gains popularity in the stock market via social media. Meme stocks are generally popular due to internet memes shared among traders on platforms such as Reddit’s r/wallstreetbets. Investors in such stocks are more often young and inexperienced. Because of their popularity, meme stocks frequently trade at prices that are higher than their estimated value based on fundamental analysis, and they are famous for being risky and volatile.
What are Meme Stocks?
A meme stock refers to the shares of a company that have gained a cult-like following online and through social media platforms. These online communities can go on to build hype around a stock through narratives and conversations elaborated in discussion threads on websites like Reddit and posts to followers on platforms like Twitter and Facebook.
How did meme stocks work?
Meme stocks are not necessarily valuable assets in the absence of cult followings. These online communities, such as Reddit’s popular Wall Street Bets, coordinate buying and selling efforts to influence stock prices. With enough online support, meme stocks can keep their stock prices high regardless of the underlying company’s value.
The fact that mutual funds have short positions in certain meme stocks contributes to the online support for those stocks.
Mutual funds are investments that pool money from wealthy investors, and short selling is when you borrow shares from a broker and sell them immediately in the hope that the stock price will fall. If this occurs, you can repurchase the shares at a lower price, return them to the brokerage, and keep the difference as profit.
However, the stock price may rise rather than fall. So, if you sell the stock you borrowed for $10 and its price rises to $50, you’re responsible for those shares, which means you owe the broker $40. And if the stock price rises to $500, you’ll be responsible for the difference.
Advantages of meme stocks
Because an increase in buying activity can cause a stock price to skyrocket, there are some advantages to owning meme stocks (and potential meme stocks before they rocket higher).
- A chance for very high returns in a short period of time.
- An ownership stake in a new investment idea before the rest of the market learns about it.
- The meme stock movement may be here to stay, as a young generation raised on social media has decades of prime investing ahead of them.
Disadvantages of meme stocks
As with other highly volatile investments (such as the related cryptocurrencies movement), there are drawbacks to betting on meme stocks.
- The meme stock trend, like other instances of virally skyrocketing stock prices, may not last forever, especially as some traders return to work and spend more time away from home.
- Because short-term stock prices are determined by supply and demand, price movements are unpredictable and can result in large losses.
- Some meme stocks do not trade on fundamentals, and returns can suddenly and unexpectedly reverse, causing the company to lose luster among individual investors.
Should you invest in meme stocks?
If you already have some spare cash, there’s nothing wrong with investing some of it in meme stocks – but if you can afford to lose it. Meme stocks are highly unstable, and there is a high risk of losing money.
Some of Meme Stocks’s example
- Robinhood Markets
- Tesla
- Bed, Bath & Beyond
- GameStop
- Virgin Galactic
- Nio
- Nokia
- Blackberry
- Palantir Technologies
- AMC Entertainment
- Snap