Meme Stocks: Are They Legit Investments? (2024)

Over the years, there has been a plethora of investing trends. One such investing trend is Meme stocks which rose during the COVID-19 pandemic. But precisely what is a meme stock? The answer to this question is quite complex. Still, in simple terms, meme stocks are shares of a company that skyrockets because of viral popularity on social media platforms like Reddit and Twitter.

The COVID-19 lockdown changed the society’s landscape across various lifestyle areas like travel, economy, technology, etc. Moreover, the stock market was also hit pretty hard during the pandemic. With people staying and working from home, social media became a central hangout for stock market investors. Soon, a new trading strategy emerged from platforms like Reddit, Twitter, and YouTube(among others) called ‘Meme Stocks”

Meme stocks rose to popularity during the Covid-19 pandemic and quickly made the headlines. However, many financial advisors and investors point out that these viral social media stocks can be quite risky as they rely on high interest from small investors to sustain their stock prices. But, criticizing a stock because it is highly risky can be a mistake. For some individuals, investing in meme stocks can be beneficial.

In this blog, we will explain what is a meme stock and shed light on the best meme stocks to invest in, among other things.

Let’s dive in.

Meme Stocks Meaning

Defining a meme stock can be quite tricky as it is a relatively new investment vehicle. Also, a meme is a vague term that is used to define an idea or an element of pop culture that is making rounds on social media. They allow individuals to share humorous content, interesting videos, or posts to other people all across the globe. The rapid and exponential effect of sharing such memes can make them go viral.

As mentioned above, a meme stock is a share of a company that quickly rises in price due to increased social media attention. These stocks usually gain popularity through community forums and discussion threads on social media platforms like Reddit and YouTube. These online communities dedicate heavy research and resources towards a particular stock to increase its value.

Although some believe the meme stock market coordinates their efforts to increase the price of a particular stock, the shareholders of meme stocks are often independent investors with their own preferences and investment ideologies.

Meme stocks emerged in the year 2020 through the Reddit forum r/wallstreetbets. Unlike other investment forums, Wall Street Bets became renowned for its unorthodox tone. Now, individuals work together in this and other similar forums to identify, target stocks, and promote them. They also invest their own money to work.

The meme stock market has also created its own personal lingo and terms that are used in social media platforms and online forums.

How Do Meme Stocks Work?

Without a social media presence and their cult following, meme stocks are not a reliable investment vehicle. Online communities like the popular Reddit forum r/wallstreetbets and other similar forums conform their efforts to influence the price of a particular stock. With enough online support and coordinated efforts, meme stocks can maintain an elevated price regardless of the underlying company’s net worth or condition.

The motivation behind the online support for certain meme stocks stems from hedge funds’ short position in the underlying companies. Hedge funds are investment vehicles that pool money together from high-net-worth individuals and wealthy investors, short selling is when you borrow stocks from a broker and immediately sell them in the hopes that the stock price will fall. If the price drops, you can repurchase the shares at the new price, return them to the broker and split the difference.

Phases of a Meme Stock

The phases of a meme stock define how retail investors evaluate and invest in meme stocks. Here are the various phases of investing in meme stocks-

Early Adopter Phase

This phase entails traders who identify and believe a certain stock is undervalued and start buying it in bulk, increasing its trading volume and price of the stock.

Early Interest Phase

The investors notice the increase in trading volumes of a specific stock and start investing in it. This leads to a substantial increase in the meme stock’s price.

FOMO Phase

FOMO or Fear of Missing Out occurs when investors are sceptical that they will miss out on the opportunity to buy a potentially profit-making stock when the prices are surging. The FOMO is basically due to the hype created by social media and online forums. Consequently, they purchase the stocks based on online attention.

Flash Selling/ Profit-booking Phase

In the flash selling phase, investors sell their meme stocks at the peak price to maximize their gains. This is the point when the stock starts spiralling downwards as many investors start pulling their investments out of fear of losing money.

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Are Meme Stocks a Good Investment?

There is a lot of debate about investing in meme stocks. However, it is important to understand the risks associated with a particular investment before diving into it. If we take the example of GameStop(the first meme stock), investors who bought this meme stock when it was still trading at $20 and sold it when it peaked at $350 could have made a hefty profit of approximately $310 per share.

On the other hand, investors who held on to their shares after the peak witnessed a sharp decline in the value to just $40 per share in just 1 month. In the next few months, the GameStop share price rose again and was trading at a price of $166 per share. In conclusion, meme stocks are highly volatile and investing in them can be an adventure if you are willing to take the risks.

That being said, they might be suitable for younger investors with a high-risk tolerance and a longer time period to recover in case of losses. However, for a seasoned or middle-aged investor, investing in meme stocks may not be the best option.

The primary drawback of meme stocks is their high volatility. It is quite hard to predict which ones will skyrocket and how long will they rise. In the case of GameStop, it rose quickly and plummeted even faster. Investors who are hoping for a long-term investment would have been disappointed by its performance.

The History of Meme Stocks

The meme stock movement unofficially started in August 2020 when a Reddit user ‘Roaring Kitty’ uploaded a video displaying game retailer GameStop’s plan to revamp its business model. This video also showed that GameStop had a significant short interest(meaning hedge funds were expecting and betting that GameStop’s stock price would drop and were waiting to sell it for a lower price to enjoy the profits).

A few days later, the former CEO of Chewy.com Ryan Cohen purchased some GME stocks, which Roaring Kitty acknowledged on Twitter(now X) In November 2020, it became public knowledge that Ryan Cohen owned a 10% share in the company.

When online retail investors understood the short positions against GameStop, people started buying GameStop stocks in bulk, making it very expensive for hedge funds to buy back from their short positions. On January 12, 2021, Cohen joined the board and the stock price grew rapidly. Two days later, the value of the stock doubled(an 8x increase from the price at the time of Cohen’s first post).

After this incident, some hedge funds incurred significant losses(some of which were forced to shut down), while some individual investors made millions in the process. Some other meme stocks also emerged after GameStop with varying levels of success. As a result, the meme stock movement adopted a Robin Hood concept of taking from the rich elite hedge fund investors and rewarding the small retail investors.

Best Meme Stocks to Invest in 2023

While GameStop may have initiated the meme stock market, many others have followed in its footsteps. Today, there are entire indexes dedicated to meme stocks. Here are the best-performing meme stocks to invest in 2023-

Note: This information is intended solely for informational purposes, not for trading purposes.

After the exponential rise of GameStop, WallStreetBets users quickly identified other stocks with heavy short interests. These included AMC Entertainment Holdings Inc. (AMC) a movie theatre chain that plummeted during the pandemic, and BlackBerry(BB), the smartphone manufacturer.

Both of these companies also saw a dramatic rise in their stock prices. As these became recognized as meme stocks, members of the Reddit forum r/wallstreetbets and other similar forums acknowledged the humour of seeing companies rise up from the ground in the stock market.

While some meme stocks performed exceptionally well, there were some that did not fare as well as others. Some other meme stocks include-

• Bed Bath & Beyond Inc. (BBBY)
• Koss Corp. (KOSS)
• Vinco Ventures (BBIG)
• Robinhood Markets Inc. (HOOD)

Read Also:- Top 10 ETF Concerns Every American Investor Should Keep in Check

Advantages of Investing in Meme Stocks

While there are plenty of risks involved, there are also some benefits of owning and holding onto meme stocks before they rocket higher.

Potential for Higher Returns: Meme stocks carry huge revenue potential. The rapid spike in the price of a stock during a short period of time offers great opportunities for retail investors to maximize their profits with a quick turnaround time.

New Investment Opportunity: Meme stocks also offer the opportunity for retail investors to get an ownership share in a new promising investment that most investors don’t even have wind of.

Relatively New Market: The meme stock market is suitable for young investors who have high risk-taking capabilities. A young generation raised on social media will have decades of prime investing ahead of them, meaning the meme stock movement could become a big thing in the future.

Disadvantages of Investing in Meme Stocks

Similar to other highly volatile investment vehicles like cryptocurrencies, there are certain drawbacks to investing in meme stocks.

Highly Volatile: Meme stocks experience a dramatic surge in prices which is usually fuelled by viral social media activity. This makes their prices very volatile and highly unpredictable. The prices can increase abnormally in a short period of time and plummet when you least expect them to, making them extremely risky for traders.

Built By Popularity: In the case of meme stocks, a company’s performance, fundamentals, and profitability don’t play a role in the demand and price of a stock. It is solely driven by hype and popularity on social media.

May Not Last: While this could go either way, as some investors return to the market and spend more time away from home, the meme stock trend may come to an early halt.

How to Identify a Good Meme Stock?

If you are an investor and looking for a great long-term meme stock(years instead of weeks or months, there are some crucial factors to consider before investing in a meme stock. Some business fundamentals and economic trends are crucial towards balancing out what can be a minor social media trend or a short-term squeeze.

• Find a company with great fundamentals like stable or growing revenue, profit margins, and a solid balance sheet(more cash and assets than debt).
• While great fundamentals are desirable, you can also choose a struggling business if it has a solid actionable plan to improve its financial results over time. This can help sustain the growth of the stock price.
• If a company has reached the meme stock status but the management has still not announced its plan, you should look for a business that can benefit from strong secular growth trends.

Read Also:- How to Invest $500 to Start Building Wealth?

What is a Meme Stock ETF?

Investing in a single stock usually carries more risk than investing in a group of stocks. It is better to diversify your portfolio across several investments to help keep it afloat in case one investment sinks. If you also want to invest in meme stocks but don’t want to hold a single stock, you can invest in an ETF through the Roundhill exchange-traded fund MEME.

It offers investors exposure to 25 meme stocks in one single ETF. The SoFi Social 50 ETF(SFYF) and Van Eck Social Sentiment ETF(BUZZ) track stocks with positive sentiment among social media users and investors, providing substantial exposure to meme stocks.

These ETFs also hold popular meme stocks like GameStop and AMC along with some stocks of companies like Tesla and Peloton. While an ETF is less risky than a singular meme stock, it is still made up of several high-risk investments that could skyrocket as well as plummet.

Common Terms in Meme Stock Investing

Meme stock market communities have developed their own lexicon to use in social media posts online. Some of these terms include-

Apes: Used to denote the members of the stock community. While some think that this is a meme related to the movie ‘Planet of the Apes’, others suggest that the label originates from the banding together of ‘dumb apes’ to overthrow the elites of Wall Street.

BTFD: It is an acronym to ‘buy the fu*****’ dip’ It means to go long on a meme stock after its price has declined in the near term

Diamond Hands: This means holding onto meme stocks despite heavy losses in the hopes that the price will increase soon.

FOMO: It stands out for ‘Fear of Missing Out’, meaning if you don’t catch the meme stock wave, you will eventually regret it.

Hold the Line: It is an announcement to encourage others to stand firm with Diamond's hands in the face of unpredictable volatility.

Paper Hands: It is a derogatory term for those who fail to maintain diamond hands. They are perceived as weak investors who sell their shares too quickly in fear of losses.

Stonks: An ironic misspelling of the word ‘stocks.’ This meme predates the origination of meme stocks and depicts a bald man in a suit staring blankly at an arrow pointing upwards in price.

Tendies: It is short for ‘chicken tenders.’ It refers to the profits made in meme stocks.

To the Moon: The belief that a particular stock will rise extraordinarily high.

YOLO: It stands for ‘You only live once.’ It is used to convey the idea that life is limited so why not buy meme stocks?

Final Words

While it is possible to make a substantial amount of money with meme stocks, it is an extremely risky activity. It ultimately relies on timing the market, which is quite hard even for seasoned and experienced investors. Meme stocks are also dependent on knowing which stocks will skyrocket and which won’t, which is practically impossible. Some popular meme stocks like GameStop and AMC continue to register higher stock prices before the short squeezes in 2021.

Risking money is an unpredictable investment can be a source of adrenaline but it is rarely the path to long-term financial stability. If you want to create a financially stable future, investing in low-cost index funds and tax-exempted retirement accounts like IRAs has a higher chance of success than relying on risky investments.

Frequently Asked Questions(FAQs)