GIPHY / istock / getty

What Is a Meme Stock?

Want to jump on the meme stock bandwagon, but not sure where to get started? Let's dive in.

What is a Meme Stock?

A meme stock is a stock that can fit almost any other classification: growth, value, industrial, small-cap, large-cap, or anything in between. These are stocks that spike in price and volume rapidly with little regard to the underlying firm’s fundamentals or value.

Meme stocks rose in popularity due to conversations and movements that originate in online forums such as Reddit’s WallStreetBets, various Twitter accounts (including Elon Musk’s own profile), and on TikTok. But because their prices are artificially bloated, they tend to crash soon after they soar, leaving thousands of (primarily retail) investors holding the bag.

The Rise (and Inevitable Fall) of Meme Stocks

Meme stocks got their start in a Reddit forum called WallStreetBets, which is frequented by day traders who share their ideas on securities, market moves, and the investments and divestments of institutional and wealthy investors.

In a paragraph, a group of day traders decided to engage in a “short squeeze” of GameStop’s stock after learning that a prominent hedge fund decided to short the stock (in essence, bet that the stock price would decline). To initiate the short squeeze, Reddit investors bought GameStop stock, which caused the price and volume to increase overnight. In turn, this attracted more investors, which sent the price higher, which began the circle once again.

But whereas past short squeezes have mostly been short-term, one-and-done deals, retail investors jumpstarted GameStop’s stock price from just $17 to over $500 in days – and dragged a dozen heavily-shorted securities and cryptocurrencies with them.

GameStop 1-year performance via CNBC
GameStop 1-year performance via CNBC
Blackberry 1-year performance via CNBC
Blackberry 1-year performance via CNBC

The GameStop Saga: Aftermath

Since January, the meme stock craze has not only earned a name in the history books but has also come under fire from investors and regulators alike.

Part of the outcry descended upon the free investing app Robinhood, where thousands of investors flocked to take part in the GameStop saga – only to find that Robinhood had suspended all meme stock trades, citing the need to meet increased regulatory deposit requirements.

In response, critics and investors accused the platform and its peers of manipulating the market and serving Wall Street interests. (While disgruntled hedge funds and wealthy investors claimed that retail investors artificially inflated prices to serve opposing interests). More than a dozen class action lawsuits were brought against the firm, with claimants alleging that Robinhood’s restrictions prevented them from taking part in a profitable moment in the stock market.

Additionally, the House Financial Services Committee and the Justice Department both launched probes into both sides of the event to determine any evidence of market manipulation on either side. The SEC even issued an investor alert warning against “hot stock” trends, or short-term investing based on social media activities.

Meanwhile, public – and occasionally political – sentiment and speculation appear to have shifted against Wall Street’s wealth-building strategies as investors, traders, regulators, and scholars reexamine the relationship between retail investors, institutional investors, and modern-day financial markets.

But it’s not all bad news. The GameStop saga also appears to have reinvigorated interest in investment markets, which may lead to fairer market prices and increased wealth in the hands of the middle class – assuming that investors receive the tools they need to succeed.

How to invest in meme stocks

If you want to make your fortune in meme stocks, our advice is simple: don’t.

As a rule, it’s unwise to let FOMO dictate your investment strategy, no matter how lucrative meme stock trading may seem. There’s no way to estimate which stock will propel investors’ portfolios to unprecedented heights. And by the time the average person climbs on, it’s likely reached the “FOMO phase.”

But if you want to invest in meme stocks, there are a few steps you can take to, hopefully, minimize your risks:

  1. Understand that buying into low-quality, high-priced stocks come with a risk of losing your capital.
  2. Do your due diligence and choose the right company. Focus on stocks with competent, creative management teams that know how to exploit the hype, which may increase the underlying value of their business.
  3. Get in early – and get out when the stock starts to drop. (In other words, prepare an exit strategy and then stick to it.)

Additionally, it’s important to recognize that most successful meme stock investors are professionals, high-net worth individuals, or traders who buy on margin at exponentially increased risk. And while a few of them do make their fortune in the stock market, they are the exception – not the rule.

If you really want to see success in your investments, taking the long approach with a well-diversified portfolio is, statistically, a better path to success.

Disclosures

Q.ai offers advisory services through Quantalytics Investment Advisors, LLC ("QIA"), a Registered Investment Adviser. This is solely for informational purposes. Advisory services are only offered to clients or prospective clients of QIA . Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. Comments by viewers or third-party rankings and recognitions are no guarantee of future investment outcomes and do not ensure that a client or prospective client will experience a higher level of performance or results. Adviser has reasonable belief that the content posted by a Third Party does not contain untrue statements of material fact or misleading information regarding its advisory services.

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