Over the last couple of years, but most prominently during the height of the COVID-19 pandemic, one of everyday retail investors' more interesting strategies has been to follow and purchase something called a meme stock. Meme stocks are formed when large numbers of individual investors on social media sites like Reddit, Twitter and Facebook become enamored with the shares of a certain company, causing the price of those shares to rapidly increase.
The concept relies heavily on the use of social media communication to inflate sentiment for this particular stock, whether there is underlying value to it or not. Some experts believed the trend was merely a product of the house-bound boredom created by the pandemic, but it could be that the wild swings and volatility of the meme stock craze might be around a while yet.
What is a meme stock?
A meme is a mental construct, such as a joke or a picture that quickly becomes contagious online and in social circles. As the reach of the internet and social media has expanded, individuals have been better able to share and disseminate amusing, thought-provoking, or caustic films, music, or ideas with others all over the globe in a matter of minutes. Such messages can quickly spread over the internet thanks to the multiplicative impact of being sent from user to user.
It was during lockdowns that all the ideal components necessary for a global meme stock movement came together: a pandemic, an influx of young new investors, and the convenience of stock trading on easy to use trading applications with low fees.
GameStop, a retail store selling video games, is often cited as the first stock to become a meme stock. In 2019, online personality, RoaringKitty, aka Keith Gill, (a US financial analyst) began posting his thoughts on GameStop stock on Twitter, YouTube, and the subreddit r/wallstreetbets. He argued that the stock was undervalued and underestimated due to the large short interest from short sellers (firms that bet against a company to profit from its share price fall).
In a video posted online, Gill went on to say that a series of hedge funds controlled the vast majority of short bets against the company, making for a potentially explosive short squeeze that may send the price soaring. A short squeeze occurs when the price of a stock unexpectedly goes up and short sellers are forced to close their positions to avoid losses, which further pushes prices higher as a result.
The predicted short squeeze finally materialized in January 2021, when short-covering and panic buying sent Gamestop share prices soaring to over $500. Hedge funds took the brunt of the losses during the squeeze, and several of them had to close their doors as a result.
Consequently, the notion of meme stocks took on something of a ‘little guy taking on the big guy’ tone, implying that the wealthy on Wall Street would be plundered in order to benefit the small time investor.
What are some of the most popular recent meme stocks?
Bed Bath & Beyond
The company was having a tough time in the last decade due to the gradual decline in sales brought on by the rise of online shopping, and the pandemic and subsequent lockdowns only made things worse.
During the last couple of years though, the company’s stock took on meme status and more than tripled in price, going from around $6 to over $20, as retail traders flocked to buy it in the hopes that it would see the same meteoric rise in value as GameStop, AMC, and others.
According to the Financial Times, one young investor purchased $25 million in stock at less than $5.50 per share, and then sold it for more than $130 million in August 2022.
AMC
When the movie theater network almost went bankrupt in January 2021, a wave of new retail investors stepped in to help out. These die-hard followers spearheaded a movement that drove AMC stock to a record high of $72.62 in June of the same year from its all-time previous low of $1.91.
Virgin Galactic
Early in 2020, Virgin Galactic rose to become one of the most talked about and popular meme stocks, but it's been a volatile ride. Shares rose from just under $12 at the beginning of January 2020 to about $44 by the end of February as a result of swarms of Reddit investors.
Early in 2021, following yet another surge, Virgin Galactic shares climbed above $54 each. Shares dropped to $16 by mid-May 2021. The stock price dropped to around $24 in early 2021, but by June of that year it had soared back up to approximately $56.
What should you know if you choose to invest in them?
Meme stocks are very real equities that are traded on real exchanges, but critics warn that their price performance and appeal have very little to do with their fundamentals but instead a great deal to do with their entertainment value.
It's important to be mindful that your investment in these stocks might lose value just as quickly as it once grew. In order to make a reasonable profit, you need to be a fairly active trader and be happy to monitor some social media chatter.
You’ll need to have a fairly high tolerance for risk, and you’ll want to find yourself a decent broker with appropriate terms like ActivTrades. This broker provides CFD accounts (leveraged and margin trading) to trade meme stocks over the short-term, as well as non-leveraged accounts to buy real shares and invest in them over the long-term.
As always with any investment strategy, but particularly here, make sure it fits with your long term goals, and never invest more than you’re satisfied to lose.
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