What is a Meme Stock? A Guide to Meme Stock Investing

What is a Meme Stock? A Guide to Meme Stock Investing

Did you know that online communities are a major factor in promoting meme stock trading? This scenario is known as the meme stock craze, where a viral post on X or a Reddit forum can persuade people to jump in and buy the stock due to online hype. 

For meme stock investors, leveraging the price performance of stocks that go viral on sites such as Reddit is very important. Join us as we take a look at the first successful meme stock, how trading in meme stocks has evolved, and the meme stock phenomenon.

Ever since meme stocks became viral in January 2021, trading in meme stocks via social media, particularly on Reddit, has led to the growth of the meme stock community. If you are looking to understand the meme stock mania, this article will be your guide towards learning about the stock trend.   

What Is a Meme Stock?

Meme stocks are shares of companies that increase in price because of online forums and social media frenzy. Meme stocks tend to have higher prices because of large interest from retail investors, instead of the actual performance of company stocks.

For instance, certain meme stock communities on platforms like X, Reddit, and Facebook play a major role in driving the prices of these stocks on social media.   

The Rise of Meme Stocks: A Brief History

The term "meme stocks" began in 2021 due to the unexpected rise of GameStop's stock price in the stock market. The price of the stock rose by 1,700% because of the collective efforts of retail investors, thereby showing the power of collective efforts. 

This meme stock frenzy started a major change in market dynamics, highlighting how the prices of meme stock rallies can be influenced by online communities.  

Characteristics of a Meme Stock

Meme stocks often have the following characteristics:  

1. Social Media Influence: The price movement and popularity of many meme stocks are driven by online discussions on platforms like X and Reddit.    

2. High Volatility: In stock markets, prices can wildly move within short periods, without having any fundamental business change.  

3. Retail Investor Participation: A major portion of meme stocks' price usually originates from private investors instead of institutions like the Securities and Exchange Commission.   

4. Disconnect from Fundamentals: The prices of meme stocks do not depend on the financial performance or health of the company being promoted by meme stock promoters. 

How Meme Stocks Work

1. A stock is identified – A stock from a struggling company that is heavily shorted and low-priced is singled out.  

2. It goes viral – Users on different online forums increase interest in the stock with memes and "diamond hands" discussions. 

3. Retail traders pile in – Private investors or members of the meme stock used tools like Robinhood to drive the stock  

4. Price skyrockets – The stock would increase because of higher demand and sellers covering short positions.  

5. Media attention fuels it further – After the short sellers target stocks go viral because of media attention.  

6. Eventually, the hype fades and the stocks fall back to a lower price, incurring losses for people who invest late.  

Understanding Meme Stock ETF

A meme stock ETF allows investors to be exposed to different meme stocks in a single investment vehicle, lowering the risk involved in betting on one stock that is highly volatile. These stocks are named or gotten from companies that are trending on online forums like X, Reddit, and TikTok. 

Examples of Meme Stock

1. GameStop (GME)

The first meme stock was Gamestop Corp, and it started in 2021 when Reddit's r/WallStreetBets ignited a buying trend as a reply to large hedge funds shorting Gamestop's stock price. The price of these meme stocks in 2021 rose from $17 to $400 in weeks, leading to massive short squeeze  

2. AMC Entertainment (AMC)

After COVID, a movie theatre chain like AMC Entertainment became a meme stock haven. With investors working together and treating the companies as a fight against Wall Street, and a nostalgic brand. To further boost the hype, AMC provided different benefits and free popcorn to retail investors. 

3. Bed Bath & Beyond (BBBY)

It is one of the meme stock companies whose trading activity was pumped because of the social media hype. The company was struggling financially and heavily shorted, which made it the next meme stock to be identified by retail investors. Nevertheless, the company went bankrupt in 2023, showing the high amount of risk involved in meme investing.    

4. Blackberry (BB)

Initially, a giant in the smartphone industry, Blackberry went viral during the GameStop saga because of the short interest in the stock. Although it transitioned to cybersecurity as a company, the nostalgic feeling is a major factor in its meme status.   

5. Tesla (TSLA)

Meme stocks like Tesla were heavily influenced by Elon Musk's social media tweets. Although it is not considered a classic meme stock, the social presence of Elon Musk drove up the price of the stock market.   

Rewards of Meme Stocks for Investors

1. Potential for Quick Gains: Early investors can gain massively from these stocks if they can correctly time their entry and exit strategy before moving on to the next meme stock.  

2. Community Engagement: Being a member of an online community like Roaring Kitty or Reddit can promote engagement from retail investors.    

Risks of Investing in Meme Stocks

1. Extreme Volatility: Ever since the original meme stock, prices can lead to significant losses because of the fast fall when the hype is over.    

2. Lack of Fundamental Support: Since meme stocks are stocks that go viral on social platforms, investing in these stocks depends on hype instead of having financial data   

3. Market Manipulation Concerns: Coordinated selling and buying of this type of stock can lead to ethical questions being asked and regulatory issues.   

YouTube Resources on Meme Stock Investing:

1. GameStop and the Rise of the Retail Investor

2. Understanding Meme Stocks and Market Volatility

Conclusion on Trading Meme Stocks

Meme stocks represent a new era in investing, where online communities can wield significant influence over market dynamics. While they offer opportunities for quick profits, they also come with substantial risks due to their volatility and lack of fundamental backing. Investors should approach meme stocks with caution, conduct thorough research, and consider their risk tolerance before participating in this high-stakes segment of the market.

Also Read: 5 Effective Cryptocurrency Investment Strategies to learn how to boost your crypto earnings.

FAQs About Meme Stocks

1. What is a meme stock?

A meme stock is a company's share that gains popularity and experiences price volatility primarily due to social media hype and online community discussions, rather than the company's financial performance.

2. How do meme stocks differ from traditional stocks?

Unlike traditional stocks, whose prices are influenced by company fundamentals and market conditions, meme stocks are driven by online sentiment and can experience rapid, unpredictable price movements.

3. Are meme stocks a good investment?

Investing in meme stocks carries high risk due to their volatility and disconnect from fundamentals. While some investors have profited, others have faced significant losses.

4. How can I identify a meme stock?

Look for stocks with sudden spikes in trading volume and price, often accompanied by trending discussions on social media platforms and forums like Reddit's r/WallStreetBets.