With the growing interest in the stock market by new investors, the frenzy has created a new type of stock: the meme stock. Meme stocks don’t mean that the internet’s favorite meme from that week is now trading on the stock market. Rather, stocks for companies themselves have gone viral online, causing investors to purchase them just for the meme.
Meme stocks are getting more and more popular - and if you’re an early adopter you can stand to make some crazy returns, like with GameStop or AMC.
But let’s take a closer look to figure out what exactly a meme stock is.
Whare is a meme stock?
Meme stocks are a fairly new term and they spawned out of trading hype and hysteria from 2020 and 2021, with discussions of the stock originating on Reddit and other online forums. Meme stocks garnered (and do garner) so much attention simply because of how fast they rise. Typically a good stock would rise 30 to 50% in a year, but a meme stock could make that move overnight. That kind of money gets people talking.
Meme stocks can be any stock, whether the underlying company is good or bad, if the internet starts to like it, thousands of retail, or non-professional, traders pile in, driving the price up. Some recent examples of meme stocks are GameStop, AMC, and Blackberry. The companies in question don’t have great fundamentals, or to say the companies really aren’t that great, but the Reddit channel WallStreetBets started talking about these stocks, specifically how much larger investors were shorting the stocks. In simpler terms, this means big investors were betting the stock price would go down. The reddit boards and retail investors wanted to stick it to the man and make these big rich funds lose money, so they all bought the stock, causing prices to soar.
It used to be that you could make the most money picking good companies, but now you can make millions just by picking the right - bad - company, or meme stock.
Because meme stocks are driven by online virality, they undergo some common cycles. There’s an early adopter phase where investors think the stock is undervalued or overshorted and start buying the stock. Then there’s a middle phase, where people who pay attention to finance media start realizing there’s something happening and start buying in. These two phases are where investors can make the most (or any) money.
Following these first phases there’s the FOMO phase, where people like your grandmother and weird uncle hear that GameStop is going to the moon and start buying in. Generally by this time it’s too late to make a ton of money, but the meme hype train keeps rolling.
After the stock has gone up to crazy levels, those early investors start taking profit, or selling in a profit taking phase, and the stock price starts going down on less purchasing demand.
The meme stock cycle
This whole cycle can happen in just a few days or few weeks. Meme stocks go to the moon and back at breakneck speeds. For example, GameStop, often regarded as the first meme stock, first began to surge in January of 2021. The stock went from $17.25 to $147.98 in a matter of weeks. By January 27, the stock had risen to $347 and by January 28th the stock rose to $483 before closing the day at $193.
This price action wasn’t because the company was good, in fact at the time Gamestop had pretty bad financials, rather the change in price was driven by thousands of people wanting to get in on the frenzy.
All this volatility and craziness has driven increased interest in retail trading, or ordinary people trading stocks. Investing in meme stocks can be a fun whirlwind and rollercoaster of to the moon, I’m going to be rich, quickly turning to how will I pay next months rent if you don’t sell at the right time.
One thing is for sure though, trading meme stocks, if timed and done right, can transform a little bit of cash into thousands or millions in just a few days. Just be prepared to lose all your investment if you play the game.
