“Meme” and “stock” seem like unlikely bedfellows.
The former refers to an often-comical image or phrase that spreads around the internet like wildfire, sometimes cementing a permanent spot in culture (think Kim Kardashian’s crying face.) The latter is a share of a company publicly traded on the stock market.
So, what do they have to do with one another?In recent years, a lot. As internet chatrooms have abounded and market watchers found a place to share ideas and build a plan of action, “meme stocks” were born.
What is a meme stock, why is it popular and should you invest? All your questions answered here.
Meme stock mania:Meme stocks are exploding once again. What does that mean?
What are meme stocks?
A meme stock is a public share of a company that has garnered increased attention on the market through online chatter in chat rooms and on social media, hence the name “meme.” These cadres of online buyers “build a narrative” around a stock, according to Investopedia, in efforts to sometimes initiate a “short squeeze.”
A shorted stock is a stock which is borrowed from a broker and then sold , with the seller banking on buying it back later for a lower price. However, a short squeeze can occur when those borrowed stocks rise in price rather than fall.
The meme stock community can build considerable clout around a share through online conversation on sites like Facebook, Twitter and Reddit. This can sometimes lead to an overvaluation of the stock as communities attempt to drive up the price of normally shorted shares.
Why is it called a meme stock?
A “meme” is a term referring to a tidbit of culture — photograph, video, phrase — that spreads rapidly online through social sharing.
The name is lent to this particular kind of stock as the shares earning the title have been chosen and widely discussed in online communities. The first meme stock is largely considered to be struggling gaming company GameStop, which in early 2021 rose sharply in price as members of the sub-thread “r/wallstreetbets” on Reddit orchestrated a massive “short-squeeze.”
What is a ‘short squeeze?’
A short squeeze is when a shorted stock’s shares rising sharply in price and buyers closing out to avoid losing big.
In the case of GameStop (GME) members of “r/wallstreetbets” bought up shares with fervor, knowing hedge fund managers counted on it as a shorted stock, eventually driving up the price from $2.75 per share to $500 a share.
As a result, short sellers were forced to choose between buying the stocks back at increased prices or waiting out a fall in price. The resulting millions lost by marquee-name banks and hedge funds immediately drew scrutiny to the phenomenon of meme stock trading.
Another similar short squeeze occurred during the summer of 2022 when meme stock communities drove up the price of the Bed, Bath, & Beyond (BBY) shares by 314%.
Is Tesla a meme stock?
Yes. Tesla is widely considered a meme stock, name-checked a healthy amount on social media and successful not only for its fundamentals but also for its online hype.
It is not as extreme an example as GameStop, but given the high-profile presence of CEO Elon Musk, it remains a stock with shares that can rise and fall based on online chatter.
Financial glossary:Here are the terms new and seasoned investors should know
Why are meme stocks popular?
Meme stocks are popular in part because they can result in a big win over a short period of time. Buying up cheap shares to have them skyrocket in price results in a large payout.
There is also collaborative element to the online chatter that drives meme stocks, and a community found in joint narratives built around potential meme stocks.
Are meme stocks safe?
As with all investments, there are risks to a meme stock. For one, in cases like Game Stop or Bed, Bath and Beyond, the price of shares can rise tremendously based exclusively on online narratives and not on the fundamental valuation of the stock.
This can make for some price volatility, particularly when a meme stock is for shares in an unstable company.
Investopedia reports that the price of a meme stock is often based on “entertainment value,” comparing the buying and selling phenomenon to a casino game and reminding that while a successfully orchestrated short squeeze can return a big payout in a short period of time, it remains a risky behavior.