Meme stocks are shares whose value rises quickly due to hype from social media platforms, rather than because of the underlying strength of the company.
- The phrase ‘meme stock’ rose to prominence in 2021 when companies such as GameStop (GME), Nokia (NOK), and Blackberry (BB) were targeted by retail investors from the r/WallStreetBets subreddit.
- The word meme is used to refer to online jokes that are enriched with popular culture. They can take the form of almost anything, from images to passages of text, and derive their humour from references within the subculture that created them.
- Investing in meme stocks is risky as they often fall in value just as quickly as they rise, and it’s often hard to predict when the hype will die down.
What are meme stocks?
Any stock that rises in value due to social media activity can technically be counted as a meme stock, but the phrase is most commonly applied to poorly performing companies that receive a lot of interest simply because of online hype. This then leads to more people buying the stock, which pushes the price up further, causing a cycle which pushes prices ‘to the moon.’
The word ‘meme’ is applied to these stocks because the interest in them is similar to how internet memes disseminate (and also because internet users often create memes directly for the purpose of promoting meme stocks). Meme stocks quickly take on a life of their own, with jokes and rocket emojis carrying them ever higher.
A key driving force behind meme stocks is the easy availability of retail investing platforms – with online broker Robinhood being particularly associated with the phenomenon. Now that people have the ability to buy and sell stocks from their smartphones, a new wave of social investing has led to a gamification of online investing, with many people now quite literally ‘playing’ the stock market.
In this context, meme stocks are representative of a wider shift in the way that technology has widened access to stock investing – and the effect seems to be growing. Since the company went public on July 29th 2021, Robinhood shares have been prominently featured on lists of meme stocks.
Since the early explosion of meme stocks in January 2021, many retail investors have been scouring the internet for the next stock which will shoot up in value. This has led to a market in which penny stocks see huge surges in interest. While the opportunities can seem tempting, you should make sure never to put money into anything because of FOMO (Fear of Missing Out) and analyse each company before buying any shares.
The first meme stock: GameStop
To understand where meme stocks came from, the best place to look is the frenzy around GameStop (GME) at the start of 2021. This moment, fuelled in part by the lockdowns during the coronavirus pandemic and stimulus cheques delivered to US citizens, was what gave birth to this new form of picking stocks.
In late 2020 and early 2021, users of the r/WallStreetBets subreddit began promoting the idea of buying GameStop shares. The company appealed to users of the community for a variety of reasons. First because it was a chain of shops that many users were familiar with from their youth. Second, because of some analysis showing the stock might be underpriced. Third (and crucially), because it was discovered that a few hedge funds had adopted a huge short position on GME.
The internet investors worked out that if they invested heavily in GME stock it would push the price higher, thus both saving GameStop and costing the hedge funds millions of dollars in a short squeeze. So that’s what they did, with incredible success. The price of Gamestop shares rose from under $18 at the start of the year to $347 on 27th January, and a new hype-driven form of retail investing was born.
At the same time as the GameStop frenzy, other stocks were targeted because of hedge fund short exposure, including AMC and Blackberry, and for a while such anti-hedge-fund vigilantism drove the meme stock craze. Large funds seem to have wised up to this now, however, and the shares promoted online are as quick to rise and fall as any internet meme.
Where can I learn more?
To find out more about investing in stocks and how to spot value in the market, check out our beginner-friendly guide to buying shares. If you’re interested in meme stocks specifically, then check out the best meme stocks and also take time to hone your skills in technical analysis, as it helps to be able to interpret price charts quickly and efficiently when investing in volatile assets.
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