What to Know About the US Meme Stock Craze
3 min read
They've invaded the internet with stock market memes. They've caused share prices to surge, then plummet, then surge again. When starting out as a novice investor, it's helpful to know what's going on with the meme stock trend. How do meme stocks begin, and what makes them so volatile?
What does 'meme stock' mean?
Meme stocks are the shares of companies that have experienced a recent upsurge in activity due to movement on social media platforms, like Twitter and Reddit. Any speculation via social media on a particular company share will prompt retail trading activity. Investors are banking on the stock's value to increase.
Meme stocks are a new phenomenon. The trend began in January 2021, but this corner of the market has received plenty of international attention, too – including in the Middle Eastern market.
How do meme stocks start?
Meme stocks tend to evolve in three ways: sentiment, social media, and shorted stocks.
Discussion around a certain stock begins with sentiment on social media. Social sentiment includes the feelings and attitudes the general public expresses on social media about a company, product, or service.
Positive or negative social sentiment can send a stock's share price up or down, respectively.
Investors will also target companies that have a high short interest ratio. This means hedge funds and other institutional investors are shorting the stock—aka betting on its downfall.
Meme stock traders like to push these stocks into the public eye as a way of sticking it to the metaphorical man. If they can send the stock price up on social sentiment alone (even if a company's fundamentals are lacking), the big institutions lose capital.
This action is known as a short squeeze, which is what happened to GameStop (NYSE:GME) in early 2021.
However, there's a big risk with meme stocks: When the share price plummets, you could lose a lot of money if you don't sell your investments at exactly the right time.
Meme stocks aren't based on fundamentals
Typically, individual stocks draw investor interest from good fundamentals (like high growth or beating earnings expectations, for example). Meme stocks rise to fame from social sentiment.
GameStop stock soared this year, even with reduced sales and the growing obsolescence of its brick and mortar stores. However, when the stock's price fell, it lost close to 85% of its value in just over a week.
One exception to the meme stock trend is Nokia (NYSE:NOK), which thrived as a meme stock but also had good financials.
Top meme stocks in 2021
Here are some popular 2021 meme stocks:
AMC Entertainment (NYSE:AMC)
Bed Bath & Beyond (NASDAQ:BBBY)
Should you invest in meme stocks?
Since meme stocks are incredibly high risk and high reward, you should only invest what you're willing to lose. These types of shares are unpredictable and volatile. Balance your portfolio with blue-chip companies and diversified funds that have proven themselves in the market.
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