It didn’t take long for memes to become a cultural touchstone. As integral as they are to our everyday lives, maybe it was only a matter of time before they named an investing theme after them. But what are meme stocks?
Let’s cover how meme stocks work, what to look for in the next meme stock, and how companies like AMC and GameStop got to where they are today.
Meme stocks are stocks that periodically rally due to internet popularity.
Investors often discuss meme stocks on Reddit (like the subreddit WallStreetBets) and often base trades on short interest.
Examples of meme stocks include GameStop (GME), Bed Bath & Beyond (BBBY), and AMC Entertainment (AMC).
Meme stocks like GME, AMC, and SPCE (just to name a few) have spawned a meme stock ETF.
When investing in meme stocks, you can still learn more about the company through earnings reports, press releases, historical analyses, and more.
A meme stock is any stock that gains popularity or awareness based on social media discussions. One platform, in particular, is at the center of the meme stock rallies: WallStreetBets on Reddit.
The WallStreetBets subreddit has 10.2 million readers and counting. This platform fuels the masses to follow trends in rallying behind a stock sometimes to no apparent end.
There are also YouTube content creators, Facebook communities, Twitter hashtags, and even Discord chats propelling these meme stocks into fame.
As for the popularity that accompanies meme stocks, it fluctuates. Just as much as there can be highs during times of high demand, so too can there be lows amid mass exoduses. Many meme stocks are popularized because they’re heavily shorted, which can play into the stocks performance as well. One peak does not necessarily mean there will be more, but it’s possible.
Related: What is a short squeeze?
A meme stocks clout grows on social media, which means it stems from social sentiment.
Theres a social sentiment indicator in the stock market that helps investors determine how a particular company is performing in terms of popularity. The indicator requires data from social media and businesses to build the charts.
In theory, the results give insight into how a stock might perform. This is by no means fool-proof, as with any stock market indicator, but it’s common. Even stock market social media StockTwits uses their own sentiment measurement to inform users:
For privately held companies, corporate value stems from the bottom line. For public companies, much of their value comes from market capitalization. Shares are worth what people are willing to pay for them (aka market value).
Social sentiment is at the core of this. Theres even a fear indicator (CBOE Volatility Index, or VIX) for contrarian investors looking to base their entrances off of others exits.
Meme stocks are a hard game to play because the peaks and dips can be arbitrary, but they do hold the potential for much larger capital gains
Meme stocks became so popular in 2021 that one asset manager created a meme stocks ETF: VanEck Vectors Social Sentiment (BUZZ).
Launched in March 2021, BUZZ holds positions in 75 companies including NovaVax, Amazon, Palantir, and GameStop as of June.
Related: How to buy stock & ETFs with a debit card
But its not ETFs that have dragged the theme into notoriety. BUZZ simply holds the stocks that are buzzing on social media. Its these individual stocks that investors are doing the work on.
Most notably, GameStop (GME) overcame challenges associated with brick-and-mortar storefronts in the digital age. GME shares grew 1,914.55 percent in the first few weeks of the year.
Theres also AMC Entertainment (AMC), an unsuspecting company struggling amid the COVID-19 pandemic. AMC shares ballooned 1,496.02 percent in the five months ending June 1.
Other companies that have become meme stocks to varying degrees include Plug Power (PLUG), Virgin Galactic (SPCE), Palantir (PLTR), and BlackBerry (BB).
There is no guarantee that any of these stocks, or other meme stocks to come, will generate returns. Many meme stock followers are willing to take the bet.
You can sign up for an account on our website or download the Public app from the App Store (iOS) or Google Play Store (Android).
There are multiple ways to fund your Public accountfrom linking a bank account to making a deposit with a debit card or wire transfer.
Navigate to the Explore page. Then, search for the meme stock of your choice in the search bar. When you see the meme stock appear in the results, tap it to open up the purchase screen.
You can find your newly purchased meme stock in your portfolio alongside the rest of your stocks, bonds, options, crypto, ETFs, and Treasuries.
Let us now consider the potential risks and rewards before investing in meme stocks.
All investments carry a certain level of risk, some more than others. Meme stocks arent immune. Because meme stocks depend on social popularity rather than company performance, they have their own set of risks and rewards.
Remember that these risks and rewards generally impact the retail investor segment (aka anyone who trades as an individual investor in the general public). While a stocks performance can alter the value of a massive hedge funds short position, consider these risks and rewards in terms of how they would impact you.
We recommend exploring the potential rewards of investing in meme stocks below.
Meme stocks hold the potential for big gains. When large amounts of retail investors band together, the upswings can be dramatic. Its also a symbol of market democratization, something that everyday investors have been working toward for decades.
Additionally, some people may focus on entertainment trading, which is akin to gambling.
Below are a few of the rewards of meme stocks:
Potential risks of investing in Meme stocks. When large numbers of people buy into a stock (which you can tell from the stocks trading volume), there are also a large number of people who could exit their positions in the short term. Meme stocks tend to maintain their peak for a limited time.
Oftentimes, meme stocks boil down to a particular influencer (like RoaringKitty on YouTube, who spearheaded the GME movement) or community (like the previously mentioned WallStreetBets).
Taking any particular advice as scripture comes with its own set of risks.
Below are a few of the risks of meme stocks:
Wondering what the next big meme stock is? For those who choose to invest in meme stocks, its a valid question to ask. While sentiment is part of the equation, its not the only consideration.
What does the company’s fiscal health look like? You can take a look at the most recent earnings report or other SEC documentation to find out.
Has the company been in the news recently? Take a look at any press releases or third-party news sites.
What’s the stock’s historical performance, and what are analysts predicting for the future? This can help you gauge whether or not you feel comfortable buying in, and how long you plan to hold.
Take every bit of due diligence with a grain of salt and form your own opinions about meme stocks.
Sometimes, a meme is so cryptic that you have to be fully enmeshed in a social media group to understand what its saying. At the same time, the rise in a meme stock’s popularity may only make sense if you’re in the social media community buzzing about it. Whatever you learn about meme stocks, know this: There are pros and cons to following trends, and keeping a balanced portfolio is a fruitful hedge against sentiment-based trades.
