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Meme stocks are among a select few stocks that are suddenly gaining traction on the Internet, resulting in skyrocketing prices and unusually high trading volumes. Redditors have found that under the right conditions, some stocks with high short-term interest rates, mainly from hedge funds, can be “squeezed”, making them costly for short sellers, and also pushing up the price of the stock as they close out to cover losses. The social media hype surrounding memes in recent months has brought significant short-term benefits to a handful of lucky traders, some of whom have even become millionaires in the process.
The memes craze, fueled primarily by investors in social media platforms and online forums like Reddit, has made some of the headlines viral. Online investment communities on social media Reddit and Stocktwits are also an important factor in the birth of the stock meme. These stocks posted huge gains, sometimes 50 to 100% in a day, after day traders, inspired by discussions on forums such as Reddit, began buying them in a coordinated manner.
Both GameStop and AMC were heavily shortened names, and high short-term interest was one of the earliest hallmarks of meme stocks. Although you can make a lot of money in a short period of time by buying and selling AMC and/or GameStop at the right time, investing in meme stock is usually risky. So while it may be a good thing that these meme names increase interest in the stock market, experts ultimately recommend a very different investment strategy.
Although meme stocks increase personal interest in the stock market, financial professionals generally recommend more diversified and prudent investment methods. Typically, these stocks are overpriced due to market speculation, resulting in huge shifts in valuations and spikes in movement in a short period of time. For this reason, these stocks are often overvalued, resulting in a sharp rise in prices in a short period of time. Meme stocks are stocks whose prices are skyrocketing, mostly driven by people on social media (mainly Reddit, Twitter, and Tik Tok). Simply put, meme stocks skyrocket in value in a short period (often hours or days) due to a sudden surge of interest on the Internet or social media and subsequent buying among small individual investors.
To put it simply, a stock meme is an individual investor’s sharp increase in the price of a company’s stock. They are regular customers of Reddit and Robinhood (a commission-free investment app), and the stocks they choose are usually short. They then buy back those shares at the lowest price, and the borrower gets the difference. They are similar because you need existing or new investors to constantly come in and buy stocks at even higher prices.
While there is potential for colossal profits, meme investors are more likely to suffer potentially large losses as stocks become overvalued and their price plummets. Part of the reason for these headlines in memes is FOMO or the fear of losing something, which is fueled by too many people touting how much money they make from these deals. This is when the price of a share rises not because of what is happening to the company and its true value (for example, the release of a product), but because of market factors.
Stonks is, as you might have guessed, an ironic way to get your message across on the Internet. Meme stocks, usually without fundamental data, suddenly grab the attention of individual investors or day traders because they are the subject of social media attention. In turn, the meme headline increases in volume not because of what the company is worth, but rather because of the hype on social media and online forums like Reddit.
When you look at cannabis companies like Tilrays and Canopy Growths, long-term charts show that the history of such stocks is driven by hype rather than logic. Usually, the meme inventory is attributed to a specific influencer (such as RoaringKitty of YouTube, which spearheaded the GME movement) or a community (such as the aforementioned WallStreetBets). If you’re an investor looking for long-term assets (years, not stocks that can be traded for days, weeks, or months), there are several important factors to consider before buying meme stocks. However, for those looking for long-term, sustainable income (the way true multi-generational family wealth is created), try building a portfolio of multiple stocks of memes that have a better one-off chance of making a profit.