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Making investment decisions based on online gossip used to sound like a bad idea, but that’s the world we live in now. After the GameStop phenomenon in the early 2020s, meme stocks have now emerged as an investment category in their own right.
Meme stocks are companies whose share price is driven by internet speculation rather than market analysis. While they can provide an easy and enjoyable way to gamble a few dollars, there are many dangers to consider before you start betting the kids’ college fund.
Key Takeaways
- Meme stocks are companies whose share prices are driven by online speculation rather than market analysis.
- Experts say the conditions that drive meme stocks are likely here to stay.
- Meme stocks are typically highly volatile, and their prices tend to depart from fundamental analysis.
- Do your research to verify any extraordinary claims about a stock before you invest.
The Conditions That Created Meme Stock Mania Aren’t Going Away
Meme stocks first boomed in 2021, when Reddit’s WallStreetBets forum began buzzing about GameStop (GME). Hedge funds had over-shorted the stock, leading online retail traders to speculate about the possibility of a short squeeze.
GameStop’s share price soared in response to the attention, and the same occurred with other stocks within a matter of weeks. They included Nokia (NOK), AMC Entertainment (AMC), Blackberry (BB), and Bed, Bath & Beyond (BBB).
The U.S. Securities and Exchange Commission looked into the trend and issued a report that ultimately fanned the flames of the meme stock trend. The SEC found a close, positive correlation between GameStop (GME) stock prices and posts about the company on social media. Trading volume had soared on days with a large number of social media posts.
Roundhill Investments then introduced the Roundhill Meme Stock ETF, tracking stocks with a high level of social media attention. The ETF included GameStop, Blackberry, and AMC, as well as another notable offering: Digital World Acquisition Corporation (DWAC), which subsequently purchased Trump Media & Technology Group’s Truth Social platform.
Meme Stocks Are Back
Meme stocks appeared to decline in 2023, and GameStop reported a $32 million loss in Q1 2024. But that June, Keith Gill—a GameStop investor who had been a leading influencer in the initial rally—began posting again for the first time in three years. GameStop’s sales immediately began to rebound.
Since then, meme stocks have continued to thrive, and they’re not showing any signs of going away. Opendoor Technology stocks, as well as Kohl’s (KSS), Rocket Lab (RKLB), American Eagle Outfitters (AEO), GoPro (GPRO), and Krispy Kreme (DNUT), have taken off thanks to meme buzz, resulting in a frenzy of short selling and volatility.
“I doubt that the conditions for meme stocks will ever go away,” says Robert R. Johnson, professor of finance at Heider College of Business, Creighton University. “Too many people want to get rich and are impatient to do so.”
Meme stock trading platforms tend to attract young investors due to their social component, ease of use, and lack of prohibitive fees. These investors don’t need a fortune, and they gain social approval when they buy in. They can also invest in a comfortable setting where they have “friends” who are taking the same steps and making the same investments.
How Social Media Turned Individual Stocks into Team Sports
The performance of meme stocks is closely tied to their social media fan base. Their prices are highly volatile because of how quickly viral trends change. Most of their investors aren’t professional traders, but their collective voices can nonetheless prompt significant price swings.
Important
Meme stock investors tend to be retail investors, not asset managers or hedge funds.
“There’s a cult-like fascination with many meme stocks,” Johnson says. “Independent speculators get together virally and can influence the share prices of stocks that become popular.”
The trend has been referred to as a “herd mentality.” Investors sell or buy based entirely on what other posters are doing and saying, regardless of whether their actions have merit. If enough investors act the same way, their predictions can become self-fulfilling.
Why Traditional Market Analysis Falls Short with Meme Stocks
This means that meme stock prices aren’t always in line with their fundamentals. Retail investors might choose stocks based on crowd sentiment, rather than traditional market analysis or financial statements.
These behaviors can cause swings that defy expert predictions. “Meme stocks are characterized by extraordinarily high trading volumes and valuations that are in no way tethered to reality,” Johnson says.
Portfolio Protection Strategies
A key characteristic of meme stocks is their volatility. Sometimes, those soaring share prices are deliberately driven up by a group of investors so they can sell their shares at a profit.
Investors who choose to add these stocks to their portfolio should be prepared for wild price swings. Consider adding some less volatile investments to keep your portfolio balanced. Investments with longer timeframes might help as well, given how quickly meme stocks can change direction.
It’s also important to question online influencers. Learn how to research to verify any extraordinary claims, and consult a neutral professional for a second opinion.
“Simply staying away from meme stocks is the best prescription,” says Johnson. “They’re the stock market equivalents of ‘get rich quick’ schemes. Those types of schemes rarely pan out.”
The Bottom Line
Dabbling in meme stocks can be a tantalizing proposition. You might be able to make money from your sofa, but you could also lose some of your hard-earned dollars.
No form of securities investing is risk-free, and even experts can make mistakes. If you’re uncertain about an investment, consult a professional for advice and guidance.
