What Is a Meme Stock Is It Advisable to Invest In It

Sharing memes has become a popular form of communicating with your friends and followers on social media. It can be used to relate a plethora of emotions, from joy, excitement, and surprise, to even annoyance, fear, and anxiety. A meme is a funny picture or video with a funny or sarcastic punchline, and they tend to circulate widely and quickly.

The word “meme” originates from an ancient Greek word, “mimema,” which means imitation. Memes are imitations of news that are shared on social media. Fascinatingly, the circulation of memes has also spread to the stock market, giving rise to the term “meme stocks.”

What Are Meme Stocks?

According to investing platform Public.com, meme stocks are stock market business shares that have become recognized due to their widespread online popularity. Instead of focusing on economic or corporate success, public sentiments play a significant role in this popularity.

As reported by Investopedia, discussions and messages on websites and social media platforms like Reddit, Twitter, and Facebook can significantly affect the value of meme stocks. These social media communities can make share prices of meme stocks both very high and very low.

How Do Meme Stocks Work?

Meme stocks do not belong to a different investment category. Meme stocks have extremely high trading volume, of which the price increases due to social media interest.

2020 saw the appearance of meme stocks through the WallStreetBets Reddit community. The users of this subreddit regularly collaborate to discover target stocks and then support them while placing their funds into action. Meme stock investors try to increase a company’s share value above its current level to gain profits. They try to maintain the value higher by continuing to hold the stock. This stands opposite to short-term “pump-and-dump” share investing schemes.

One user presented the following summary of the meme stock cycle in a conversation on the WallStreetBets subreddit:

Early Adopter Phase – A small group of investors begins to make purchases of a specific stock since they find it undervalued. Eventually, the cost of the shares rises.

Middle Phase – Those paying close attention to the market and these stocks begin to notice an increase in volume. The stock price then increases as the number of people purchasing increases.

Late/FOMO Phase – News of the stocks circulates on social media and online forms of discussion boards. Consequently, the fear of losing out (FOMO) sets in, and more retail investors start participating.

Profit-Taking Phase – Following a few days, purchasing reaches its highest point, and the early investors start to cash out. As the worry of losing money starts setting in, it triggers the selling stage. Similar to the buying stage, this creates a chain reaction, and the price drops at this point.

Is It Advisable to Invest in Meme Stocks?

The benefits of buying meme stocks are real. Nevertheless, like anything else, there are drawbacks as well. Looking at the bright side, especially to the early trend capturer, meme stocks can quickly deliver high returns. Moreover, despite much research, investors can effectively follow a trend and earn high returns in the short term.

But it’s essential to remember that these stocks are highly unpredictable and risky. At times, meme stock prices increase swiftly – sometimes in a matter of days – compared to the growth of a standard stock, which can take several years. Conversely, stock prices are also subjected to sudden drops. The root cause is that short-term hype is more frequently responsible for price hikes than actual results. However, it is doubtful if the stocks will remain at this level for a lengthy period.

As a general rule of thumb, placing more than 5–10% of an investment portfolio in such stocks is not advisable. By making an investment order through an online stockbroker like IIFL Securities, one can become an investor in meme stocks, similar to how they would invest in other stocks. ETF is another way for investors to buy in meme stocks.

GameStop

GameStop, an American retailer of electronics and video games, appeared as the first meme stock. Based on reporting by the Guardian, its stock price went up by more than 10,000% from $3.25 in April 2020 to $347.50 at the end of January 2021. Investopedia refers to this increase in price as a “spectacular short squeeze.” This occurs when many investors bet on a price drop in the stock.

As the investing website Business 2 Community reported, other meme stocks contain Bath & Beyond, cinema chain AMC, home retailer Bed, and commercial spacecraft developer Virgin Galactic. All of these are situated in the United States.

Bottom Line

Investors have undoubtedly earned and lost millions of dollars in the meme stock world. Indeed, there are chances of making money with meme stocks. However, their most significant drawback is that they remain unpredictable.

Conclusively, the attention created by the social media community leads meme stocks to price hikes at particular times. It is difficult to foresee how the stocks’ prices will change. Although investing in such companies could bring immediate gains, it could be risky in the long run!