Meme stocks are shares that gained popularity and achieved a cult-like following on social media. As a result, private investors in online communities can create hype and influence the price of individual shares.
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How memes work
A meme is an element of popular culture that goes viral and quickly penetrates people’s minds. The Internet and social networks are widely developing. This phenomenon has intensified, affecting many segments of the economy, including investing.
As far as the stock market is concerned, meme stocks appeared after 2020. Several factors contributed to this.
Coronavirus pandemic and lockdowns
Many people were stuck at home, getting bored and becoming more involved in the digital world.
Development of brokerage services
Convenient and affordable commission-free apps like Robinhood emerged. Stocks became easy to buy with one click.
Loose monetary policy and low rates
Hordes of investors entered the market when deposits and bonds failed to provide an opportunity to make good money. People collected their bank savings and carried cash to the stock market. Shares became a popular tool to secure early retirement.
Usually, the stock value comes from fundamental factors, such as financial flows, news or political agenda. But because of the high liquidity and money supply, many venture capital and money-losing assets often outperformed traditional businesses. In particular, 2021 was a record year for public offerings on the stock exchange.
A meme stock is a stock that gains popularity among retail investors through social media. Meme stocks appear when individual companies catch on with individual investors. Coordinated efforts create momentum, allowing prices to move.
How to invest safely in hype stocks
There is a so-called short run when the price growth accelerates due to the closing of stop orders and short positions regarding big players. As a result, the stock takes off “to the moon” by tens and hundreds per cent.
A short squeeze is a rapid rise in quotes when many short positions close simultaneously.
A short, or short position, involves betting against the market, expecting the prices to decline. To do this, a trader borrows shares from a broker and sells at the current price, hoping to buy back shares at a lower price in the future. The difference between the sell price and the subsequent buy price is the profit.
A short run occurs amid high demand for a share when traders have to close shorts to buy securities from the market at the current disadvantageous price. This situation results in a cascade of purchases. The increase in demand due to the closing of shorts serves as fuel for further price growth.
The Gamestop case
The Gamestop is the first and most widely known action meme.
Gamestop is a retail chain selling video game consoles and computer games. The company operates in the offline segment, its business is morally obsolete, and stock quotes have been systematically falling for several years.
At the end of 2020, members of the Wallstreetbets community (Reddit) agreed to play against funds, holding Gamestop shorts. Community members started buying shares. At first, this had no effect since funds began to short even more actively, expecting the mess to calm down quickly. But community members did not give up, and soon professional traders joined them, also going long.
As a result, in January 2021, there was a short run. Gamestop shares soared hundreds of per cent. Hedge funds that have been betting on stocks have lost about $6 billion in a month.
The stock soared first from $19 to $150. The second run was to $400. Source: investing.com
By 2021, the number of members of the Wallstreetbets community has grown to 8 million. Even major investors started to believe that “amateur soldiers” could influence the stock market.
Encouraged by Gamestop’s success, Reddit users targeted other falling stocks with more open short positions. These were shares of AMC Entertainment Holdings (AMC), a movie theater chain whose profits were declining at the height of the pandemic, and Blackberry Limited (BB), an outdated smartphone manufacturer. Both stocks also managed to swing, and they rose several times.
Some meme stocks didn’t fly as impressive, even with a short run. Among them are Bed Bath & Beyond (BBBY), Koss (KOSS), Vinco Ventures (BBIG), Support.com, and even Robinhood itself (HOOD).
How you can make money with meme stocks
Earning from meme stocks is more related to trading than investing because the growth of such assets is not due to the fundamental factors. It is unlikely that such securities could be a good choice for a long-term portfolio.
Meme stocks are usually backed by many short positions when the price falls for a long time. Meme stocks are often about low-quality companies in bearish trends and the bigwigs betting against such companies. Holding such an asset is risky.
You can make money on meme shares if you invest before the start of the demand rush. You can also be lucky enough to “jump on the bandwagon.” But in the short run, there is an extreme surge in volatility. An asset can fall at any moment and very rapidly.
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