What are meme stocks and how do they work?


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.

TL;DR

  • Meme stocks refer to stocks that have gone viral with internet popularity.
  • A meme stock’s value is rooted in social sentiment rather than solely on core economic or corporate indicators.
  • There are rewards involved (like potentially monumental gains) as well as risks (like potentially bigger losses).
  • 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 probe the company for more information through earnings reports, press releases, historical analyses, and more.

Meme stocks, explained

A meme stock is any stock that sees increased 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 stock’s performance as well. One peak does not necessarily mean there will be more, but it’s possible.

Related: What is a short squeeze?

Social sentiment: How meme stocks popularize

A meme stock’s clout grows on social media, which means it stems from social sentiment.

There’s 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. There’s 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.

Big moments in meme stocks this year

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 it’s not ETFs that have dragged the theme into notoriety. BUZZ simply holds the stocks that are buzzing on social media. It’s these individual stocks that investors are doing the work on.

Most notably, GameStop (GME) took the world by storm despite obstacles that accompany brick-and-mortar storefronts in the digital age. GME shares grew 1,914.55 percent in the first few weeks of the year.

There’s 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.

Meme stocks are prone to risk and reward

All investments carry a certain level of risk, some more than others. Meme stocks aren’t immune.

Because meme stocks depend on social popularity rather than company performance, they have their own set of risks and rewards. 

Bear in mind 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 stock’s performance can alter the value of a massive hedge fund’s short position, think of these risks and rewards in terms of how it would impact you.

The rewards of meme stocks

Meme stocks hold potential for big gains. When large amounts of retail investors band together, the upswings can be dramatic. It’s 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.

The risks of meme stocks

Volatility tends to be higher with meme stocks. When large numbers of people buy into a stock (which you can tell from the stock’s 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.

Ask more questions than ‘What’s the next big meme stock?’

Wondering what the next big meme stock is? For those who choose to invest in meme stocks, it’s a valid question to ask. While sentiment is part of the equation, it’s not the only consideration.

Other questions include:

  • 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.

Bottom line

Sometimes, a meme is so cryptic that you have to be fully enmeshed in a social media group to understand what it’s 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.

Related: What to know about the potential 2021 Reddit IPO

Rachel Curry is Pennsylvania-based content writer and journalist talking all things finance. She likes to give meaning to numbers by humanizing them. You can connect with her on Twitter at @writingsofrach.

The above content is provided is paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

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