Meme Stocks: A Viral Phenomenon in the World of Investments

In recent years, the financial world has witnessed a phenomenon known as "meme stocks." These stocks, characterized by their meteoric rises in value driven by viral social sentiment, have generated a significant buzz among investors and the general public. But what exactly are meme stocks, and can they be considered genuine investments? In this article, we will explore the concept of meme stocks, their origins, the stocks that have become part of this movement, and whether they can be regarded as legitimate investment opportunities.

What Are Meme Stocks?

A meme stock is a publicly traded company's shares that have gained viral popularity, primarily through heightened social sentiment. This viral sentiment often originates from online communities, particularly on social media platforms, where enthusiasts share and discuss their views on specific stocks. Meme stocks frequently attract extensive attention and analysis in online forums, such as Reddit, as well as on platforms like Twitter and Facebook.

It's important to note that meme stock communities are typically composed of uncoordinated, independent individuals, each with their unique investment perspectives. These independent actions, however, have been shown to trigger short squeezes in stocks that are heavily shorted. As a result, meme stocks can become overvalued relative to traditional fundamental and technical analysis.

Meme Stocks: Origins and Key Characteristics

Meme stocks, as we know them today, emerged in 2020 through the Reddit forum r/wallstreetbets. Unlike conventional investment forums, WallStreetBets gained notoriety for its unconventional and often irreverent tone. Users on such forums collaborate to identify target stocks and promote them, while also investing their own money.

The first widely recognized meme stock was GameStop (GME), a video game retailer. The stock's price skyrocketed, increasing as much as 100-fold over several months due to a coordinated effort by the WallStreetBets community, which orchestrated a short squeeze.

GameStop: The First Meme Stock

The GameStop phenomenon began when Keith Gill, known as Roaring Kitty on YouTube and u/deepF...Value on Reddit, posted a video in August 2020 outlining the case for GameStop's potential price surge. Gill pointed out that GameStop had one of the highest short interests in the market, largely held by hedge funds. He predicted that a short squeeze, where short sellers would need to cover their positions, would drive the stock's price higher.

Subsequently, Ryan Cohen, former CEO of Chewy.com, invested in GameStop. This investment was widely acknowledged on social media platforms, further fueling the stock's momentum. In January 2021, the predicted short squeeze materialized, propelling GameStop's price to nearly $500 per share. This event marked the narrative of small retail investors taking on the Wall Street elite.

Other Meme Stocks

While GameStop was the pioneer of meme stocks, other companies soon joined the meme stock movement. AMC Entertainment Holdings Inc. and Blackberry Limited, both struggling companies with substantial short interest, experienced rapid share price increases, generating substantial attention and humor within the online meme stock community.

Other meme stock names have included Bed Bath & Beyond, Koss Corp., Vinco Ventures, Support.com, and even the meme stock enabler Robinhood Markets Inc.

A Meme Stock Glossary

Meme stock communities have developed a unique lexicon in their online discussions. Some of the commonly used terms include:

• Apes: Members of the meme stock community.
• BTFD: "Buy the f***ing dip," which suggests buying a stock after its price has declined.
• Diamond hands: Holding onto a stock despite losses, with confidence in future price increases.
• FOMO: "Fear of missing out" on the meme stock wave.
• Hold the line: Encouraging others to stand firm during market volatility.
• Paper hands: A derogatory term for those who sell their shares quickly.
• Stonks: An ironic misspelling of "stocks."
• Tendies: Refers to profits made in meme stocks.
• To the moon: The belief that a stock's price will rise exceptionally high.
• YOLO: "You only live once," so why not invest in meme stocks?

Meme Stocks and Corporate Actions

Companies have also capitalized on the meme stock phenomenon. For instance, AMC Theaters CEO Adam Aron took advantage of the elevated valuation of his company and engaged in a series of secondary offerings, raising more than $1.5 billion from meme stock buyers. GameStop followed suit, raising nearly $1.7 billion through a secondary offering.

Meme Stocks and Short Selling

Meme stocks are often heavily shorted, meaning a significant proportion of their outstanding shares are sold short. Short selling is a strategy where someone sells shares they do not own, betting that the stock's price will fall. As more shares are sold short, the stock becomes harder to borrow, making it difficult for short sellers to cover their positions.

Short squeezes occur when short sellers are forced to buy back shares at higher prices, driving the stock's price up. GameStop's short squeeze is a prime example of how retail investors used this strategy to their advantage.

Are Meme Stocks Real Investments?

Meme stocks are indeed real stocks traded on public exchanges. However, their price performance often relies more on social sentiment and speculative hype than on fundamental financial metrics. Critics argue that meme stocks are more akin to speculative playthings than traditional investments.

The Rise and Fall of Meme Stocks

Many meme stocks that saw meteoric price increases in 2021 have since experienced significant declines, emphasizing the volatile nature of these investments.

In conclusion, meme stocks are a fascinating and unique phenomenon in the world of investments. They have gained popularity due to their viral nature and the collective actions of online communities. While meme stocks are real stocks, they often defy traditional investment principles and are driven by social sentiment. As investors and regulators continue to grapple with this new breed of stocks, it remains to be seen whether meme stocks will maintain their influence in the financial markets or become a passing trend.

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