
What is a Meme?
Before we define a meme stock, what exactly is a meme?
A meme is a popular text, image, or video in pop culture that is quickly shared among social media users, and multiplies its popularity. It is usually funny or sarcastic and quickly goes viral online.
What is a Meme Stock?
A meme stock is a stock that increases in trading volume simply due to its sudden popularity among retail investors who communicate with each other on social media.
The trading volume, volatility, and price of the meme stock is completely unrelated to the actual value of the stock or financials or fundamentals of the underlying company. In fact, there may be no notable developments or news from the company itself. The stock is popular simply because the social media community decides that it is popular.
Memes about the stock are shared among traders, who are usually young and novice investors, hence the name “meme stocks.”
Pumping Stocks on Social Media
Pumping stocks is not new. In fact, pumping stocks online is not new at all.
In the 1990s, during the .com bubble when Internet stocks were all the rage and their prices were bid up sky high, Internet stocks were pumped and made popular in online forums and chat rooms that popped up at that time. Many of the most popular forums still exist today.
Prior to online forums, stock promotion companies would make phone calls to potential investors and send out mailings and faxes to pump a stock. Online forums replaced mail and fax.
Today, any individual with an Internet connection and a social media account can start a stock promotion campaign. If that individual has a strong following online, his campaign can be very successful as his followers promote the stock to their followers, and the multiplier effect leads to increased trading volume in that stock.
This phenomenon has led to the rise of meme stocks on social media platforms such as Twitter and r/wallstreetbets on Reddit.
Popular Meme Stocks
The term meme stocks really came to the fore in 2020, when the stock of GameStop, a video game retailer with relatively poor financials, suddenly became popular. A few large hedge funds had taken heavy short positions in the stock as they expected its financials and fundamentals to continue to deteriorate. A mob of small retail traders decided to take the opposite side of the trade and bid the stock price upwards. They traded on cheap trading platforms like Robinhood. By 2021, this caused a GameStop short squeeze as shorts were scrambling to exit their short positions as they lost money.
Other meme stocks that experienced similar sudden fame were Bed, Bath & Beyond and AMC Entertainment Holdings Inc., the movie theater chain.
Meme stock trading has almost become a battle of David against Goliath. Small retail traders see themselves as David and intend to profit from a run-up in the meme stock price while inflicting painful losses on hedge fund Goliaths that have a short position in the stock.