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Meme stocks have been a hot Wall Street investing trend in recent years. A meme stock typically refers to the shares of a company that have garnered massive attention among retail investors on social media platforms, who then artificially prop up their prices within a short turnaround time regardless of underlying business fundamentals. Meme stocks emerged in 2020 during the COVID-19-inspired recession, and rather than fade away, they have become a common occurrence. Meme stocks are as lucrative as they are risky. But are they worth your attention?
How Do Meme Stocks Work?
Meme stocks have a viral component. A stock becomes the subject of discussion online, and interest is generated among retail investors. As word on the highlighted stock spreads, more and more investors join the bandwagon, and the share price spikes. Because the rally is artificial, the stock eventually collapses again or starts trending sideways.
Here is the typical market cycle of a meme stock:
- Early Adopter Phase – A small minority of investors identify a stock they believe to be undervalued. They then start to purchase chunks of it, and the stock begins edging higher.
- Middle Phase – The stock gains the attention of more investors who notice increased volumes and decide to join in. This further extends the rally of the underlying stock.
- FOMO Phase – This is referred to as the late ‘fear of missing out’ stage. At this stage, word spreads throughout online discussion boards and social media platforms about the underlying stock. More retail investors join at this stage, but the spike in prices also starts to catch the attention of short-sellers.
- Profit Taking Phase – After a few days of buying peaks, early adopters start cashing out. Other investors who are driven by emotion also start cashing out, fearing potential losses. Selling becomes a chain reaction, and the stock starts spiralling downwards.
After going through those four phases, the underlying meme stock will likely witness sideways price action for a while until it catches investor attention again. Early adopters profit the most during a meme stock cycle, whereas FOMO phase buyers are usually at risk of having their capital trapped by the stock.
Pros and Cons of Meme Stocks
- Potential High Returns. Meme stocks experience a massive spike in price over a short period. Such a spike presents an excellent opportunity to make high returns within a quick turnaround time.
- New Investment Idea. Meme stocks allow investors to get in on a new opportunity ahead of the market. It is a rare opportunity for retail investment money to be ‘smarter’ than the traditional institutional capital.
- Solid Trend. Meme stocks investment is now a solid trend that will not fade soon. It is fuelled by a young generation that has grown with social media, and they still have a big future of investing ahead of them.
- High Volatility – Meme stocks are driven by distorted demand and supply forces, which make their prices very unstable and highly unpredictable. The choppy price action happens within a short time, and this can be very risky for traders.
- No Fundamentals – Meme stocks are driven by social media hype and the illogical enthusiasm of retail investors. Underlying business or industry fundamentals play no part in the supply or demand of the meme stock.
- Stock Dilution – Some meme stock companies try to take measures of their newfound social appeal to bolster their balance sheet for the future. A common measure is to issue more shares to the public, which eventually leads to stock dilution.
Meme Stocks List
Here are some examples of meme stocks:
GameStop was the first successful meme stock. GameStop Corp., a video game retailer, was heavily impacted by the 2020 covid19 pandemic. Even before that, the company was facing long-term headwinds as online gaming continuously replaced physical games.
The stock first gained attention when a Reddit user in the popular r/wallstreetbets subreddit explained how GameStop stock would rise from around $5 to $50 per share.
Part of the reasoning was that the stock had the highest short interest among institutional investors, who would need to cover their positions in the event of a short squeeze. By January 2021, the stock had hit $20, and the anticipated short squeeze started unfolding.
GameStop stock then spiked to an all-time high of circa $485 before the end of January 2021 and ignited the meme stock investing phenomenon described as a ‘David vs Goliath’ battle on Wall Street. GME has since retreated from its peak and currently trades just above $100 (as of May 2022).
AMC Entertainment (AMC)
Like GameStop, AMC Entertainment was a struggling company that dealt even harder blows during the covid19 pandemic. The movie theatre operator was staring at bankruptcy, but it caught the attention of social media investment communities, who were already buoyed by their ‘success’ in GameStop stock.
AMC traded below $5 for a while before the attention of ‘meme stock investors’. It spiked above $10 in January 2021, and after a period of sideways trending, it jumped over 500% in May 2021 to print an all-time closing high above $63. AMC has since retreated to trade around $15 currently.
NOK became a ‘Reddit stock’ in January 2021. Its price surged over 100% to print a peak of around $6. But unlike GameStop and AMC, Nokia is not a struggling company. The investors might have targeted the company due to a supposedly low stock price after a covid19-induced slowdown in the 5G market.
After the meme stock frenzy, NOK returned to its previous levels. However, the stock has since recaptured the January 2021 peak and is currently settled above $6. This is not a result of meme stock investors but rather the company’s solid fundamentals.
Nokia has inked lucrative 5G deals worldwide, and NOK remains a solid long-term stock despite its meme stock history.
Virgin Galactic (SPCE)
Shares of Virgin Galactic experienced the short-squeeze mania of meme stock investors in early 2021. SPCE stock twice rose from above $20 to print peaks above $60 in January 2021 and February 2021.
After those extraordinary events, SPCE tumbled to trade at below $10 (as of May 2022). The fall was triggered by a combination of fundamental factors: a general bear market, negative corporate news, and the commercial flight launch schedule changes.
Blackberry Ltd. became a meme stock company in mid-2021 when its shares climbed from below $10 to print a high above $25.
BB stock currently trades just above $5, with the company facing negative business fundamentals that include weak earnings reports, diminishing licensing revenue, and overall negative sentiment.
But the now cybersecurity company has successfully transitioned from mobile phone manufacturing and is well placed to play a leading role in the emerging industries it operates in.
Trading Meme Stocks
Trading meme stocks is very lucrative despite the risks involved. It is recommended to use limit orders such as stop losses to limit losses, lock in profits, or take profit orders to book profits when the target price is hit automatically.
Because of their short-term cycles and wide trading ranges, meme stocks are ideal for trading in the CFD markets. As CFDs, traders can trade meme stocks with leverage, unrestricted short selling, and flexible and innovative order types.
Meme stocks are an emerging trend that will continue to recur as social media becomes more impactful in every facet of human life. They can add spice to any portfolio, but investors should know their risks to trade them effectively.
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- What are meme stocks?A meme stock refers to shares of a company that has viral online and garnered massive attention from retail investors.
- Should I buy meme stocks?It depends. Meme stocks are ideal for aggressive short-term traders willing to take high risk for high reward.
- Are meme stocks a good investment?Meme stocks can be good long-term investments if the underlying companies have solid fundamentals, in which case, the hype is just an added advantage.
** Disclaimer – While due research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.