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What Is A Meme Stock

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What is meme

A meme stock is defined as the shares of a company that have gained cult-like popularity online and via social media platforms. This popularity is aggregated into online communities that push these meme stocks.

They do this by generating and building hype around a stock via extensive narratives and conversations in discussion threads on websites such as Reddit before posting these discussions to followers on platforms such as Facebook and Twitter.

There has also been a development of a glossary of informal slang and market terminology in the meme stock communities. These include terms such as “tendies” (represents profits as it refers jokingly to the number of chicken tenders that can be bought with the profits), “to the moon” (refers to an expectation of exceedingly above-average returns), and “diamond hands” (referring to steady hands that will not sell even when there are dips in prices).

Understanding Meme Stocks

What exactly is a meme? A meme is an idea or a form of popular culture that spreads and proliferates across the minds of many people. The relevance and popularity of memes have grown with advances in the internet and the emergence of social media that has enabled people to quickly spread intriguing, sarcastic, and funny videos, posts, or pictures to other people around the globe. The lightning speed with which these posts are shared as well as the multiplicative effect of constant sharing gave birth to the viral concept.

Also Read: What Is A Bear Trap In Trading?

Historically, communities devoted to promoting stocks started with internet chat rooms and discussion boards. This began in the late 1990s and early 2000s in which these sites contributed to the promotion of the dot-com stocks which helped drive their prices up until the famous burst. However, meme stocks were not seen until the year 2020 when the Reddit forum WallStreetBets led other similar forums to identify specific stocks and promote them while also investing their money. The model used by these forums is different from the online pump-and-dump schemes whose main purpose is to defraud unsuspecting investors. Rather, these meme stocks are promoted through purchasing and holding even after the price spikes.

How Meme Stocks Work

The popularity of meme stocks is attributed to the online conversations as word travels rapidly on the internet which causes a stock to go viral leading to rapid price spikes. However, since the subsequent increase in price is not based on the company’s actual performance but rather on hype, these spikes tend to be succeeded by an inevitable crash. The meme stock cycle consists of four phases.

  1. Early adopter phase: this is the phase where a small group of investors feels that a specific stock is undervalued and as such, they start to purchase large quantities of it thus leading to a gradual rise in the stock’s price.
  2. Middle phase: this is when an increase in the volume of that specific stock starts to catch the interest of those that are watching the market thus leading to an increase in purchases causing the stock’s price to balloon.
  3. Late phase: this is also known as the FOMO phase from the common slang “fear of missing out” because by now, word has spread about the stock across online forums and social media groups thus attracting more retail investors.
  4. Profit-taking phase: after a couple of days, the process of buying reaches its peak, and those that got started early, start to cash out. Similar to the buying phase, the selling phase also plays out like a chain reaction as people are afraid of losing money. This is when the price begins to drop.

Based on this cycle, it is the early adopters that stand a good chance of making huge profits from these meme stocks because immediately after the meme stock cycle is in the FOMO phase, the chances of making a profit become extremely low.  

The First Meme Stock

The first meme stock is GameStop which is a brick-and-mortar video game retailer. Its journey as a meme stock began in the year 2020 when a YouTuber posted a video (which later went viral) detailing reasons why the shares of GameStop Corp. (GME) could rise from $5 to $50 per share. Part of the explanation put forth by the YouTuber was that the stock had one of the highest short interests in the market, with most of the short positions held by hedge funds and that if a massive short squeeze should happen, then these funds will have to cover their positions which will drive the stock’s price to a much higher level.

Not long after the video was released, a prominent investor and former CEO bought an undisclosed amount of GME stock. A few months later, it became public that this CEO had a 10% share in GameStop. He joined the company’s board not long after and there was an 8-fold increase from the time the YouTuber’s video was released and when the first significant purchase was made.

In the early part of the year 2021, the short squeeze suggested by the YouTuber happened and the price of GME skyrocketed to almost $500 amid a frenzy of panic purchases and short-covering. Those that were eventually negatively affected by the squeeze were a couple of hedge funds with some of them having no choice but to shut down due to the huge level of losses suffered. Just like that, the meme stock movement was born and two years later, it is still going strong.

Advantages of Meme Stocks

Since an increase in buying activity can cause a stock’s price to soar, there are certain benefits to investing in meme stocks (and potential meme stocks before their values rise much higher). These benefits include:

  • An opportunity to earn very high returns within a short period.
  • An ownership stake in a novel investment idea before it gets spread to the rest of the market.
  • Considering that this is a young generation that is raised on social media and has multiple years of prime investing ahead, it could mean the meme stock movement is here to stay thus creating constant opportunities for people to make huge profits.  

Also Read: What Companies are in The Consumer Services Field?

Disadvantages of Meme Stocks

Similar to trading other volatile financial instruments such as cryptocurrencies, there are drawbacks to investing in meme stocks some of which are listed below:

  • Supply and demand are the main factors that drive meme stock prices in the short-term which means price moves are unpredictable and could result in rapid losses.
  • Considering the meme stock movement started when people were in lockdown in their homes, there is a possibility that the trend might not last, especially as some traders return to work and are so busy with less time to spend at home.
  • Trading of some meme stocks is devoid of any fundamentals and returns may change course without warning thus leading to the company losing its attraction among individual investors.

Meme Stock Glossary

There is a specific lingo used by meme stock communities in their online posts and some of these terms include:

Apes:

used to refer to members of the meme stock community with some attributing it to a meme related to the movie, Rise of the Planet Apes. Although others have suggested that the term comes from the joining together of “dumb apes” to take on the elite of Wall Street.

Diamond hands:

this is used to refer to the act of holding on to a meme stock even in the face of heavy losses because there is a confident expectation of an imminent price increase.

Hold the line:

used as a battle cry for encouraging other members of the meme stock community to remain firm with diamond hands in the face of volatility.

Paper hands:

this is a derogatory term aimed at those that fail to maintain diamond hands within the meme stock community. They are seen as weak individuals who are too quick to sell their shares because they lack the conviction to stand firm.

YOLO:

it stands for “you only live once” which translates into why not get into the meme stock trend and invest.

FOMO:

this stands for “fear of missing out” which translates into failing to catch the meme stock wave early will lead to regrets later.

To the moon:

this term refers to the idea that a stock’s price will rise extremely high as if to the moon.

BTFD:

this is an acronym for ‘buy the f***ing dip’ which means members of the meme stock community are encouraged to go long on a stock after a decline in its price in the near term and the process is expected to be repeated every time such a drawdown occurs.

Bottom Line

A meme is an idea or a form of popular culture that spreads and proliferates across the minds of many people. The relevance and popularity of memes have grown with advances in the internet and the emergence of social media that has enabled people to quickly spread intriguing, sarcastic, and funny videos, posts, or pictures to other people around the globe

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