If you were an active trader during the early months of 2021, you could watch the meme stock rally unfold in real-time. Investors and institutions will study the events of that time for decades as immense fortunes were made (and lost) in just a few weeks.
While the meme stocks are fizzling out today, it's important to understand how the craze came about and whether these companies are still worthy of our capital in the present day.
What is a Meme Stock?
So what is a meme stock, exactly? And what is a meme stock rally? To borrow a quote from a famous Supreme Court justice, it's something you'll know when you see it. Meme stocks aren't a specific sector or class of equities, but a loosely-tied group of securities paraded about by social media influencers, retail investors and pot-stirring CEOs.
To understand meme stocks and pick the next meme stock, you'll need to understand the meme definition. In a broad sense, a meme is simply an imitation, such as an image or video spread around the internet. Anyone with a Facebook or Twitter account has encountered a meme, like the Drake Hotline Bling image or the two "Always Has Been" astronauts. Usually, people use memes repeatedly with different quotes or connotations, which enables them to spread virally over social media.
The meme stock meaning piggybacks on this viral nature as many traders flocked to these stocks due to repeated pushing on Reddit, Facebook, Twitter, Instagram and other social media outlets. News of these stocks spread like wildfire throughout the internet, causing lots of dollars to flow in from various sources.
Meme Stocks, Explained
The meme stock market has a few overarching characteristics. First, most of these companies are small by the measure of market cap. It's much easier for a viral trend to lead to actual price movement when the float and market cap are small.
Secondly, the original meme stocks had a sense of nostalgia attached to them. Video game retailer GameStop Corp. (NASDAQ: GME) was the original meme stock and many traders had fond childhood memories of visiting GameStop locations and selecting their favorite console games. AMC Entertainment Holdings Inc. (NYSE: AMC) is another meme stock led by nostalgic feelings, since who didn't love going to the movies in their youth?
Finally, the key to meme stock mania was short interest. The original meme stocks were shorted heavily by certain institutions and hedge funds, which many retail traders viewed as a coordinated attack on these businesses. The concentration of short selling from sophisticated investors created a narrative in which meme stock traders viewed themselves as a force for good, fighting back against "Wall Street pros" who unfairly harmed their favorite businesses. This "us vs. them" mentality created a rallying cry for social media influencers to push these stocks for moral reasons.
The reality of the situation was murkier. Many of these companies were in severe financial distress, and they based the short thesis on actual stats, not market manipulation. Retail traders considered hedge funds a monolithic entity even though many hedge funds profited from parabolic meme stock moves while others lost billions on their short positions.
Learn more: Best Meme Stocks to Buy Now and Best Meme ETFs to Buy Now
Meme stocks tend to go viral just like your typical internet meme. In most cases, these viral stock trending instances stay confined to certain sections of social media, like finance people on Twitter or the WallStreetBets group on Reddit. Occasionally, a person with a large following can induce a viral craze that results in millions of dollars of altered market cap.
Tesla CEO and social media provocateur Elon Musk is one of those people. During the meme stock craze of 2021, Musk tweeted several times about GameStop and the meme-themed cryptocurrency Dogecoin, causing both prices to escalate after he published his tweets.
However, "virality" works both ways, and memes often have short lifespans. Social media influencers can push meme stocks higher if enough eyeballs land on their posts, but the rallies usually dissipate as quickly as they start. And for those who entered these stocks at the end of the rally fray, the results were frequently disastrous.
When Did Meme Stocks Start?
GameStop was the original meme stock, garnering significant attention on the WallStreetBets Reddit board. An investor named Keith Gill (known by his Reddit handle, which we can't print here) proposed a theory about the beaten-down game retailer, claiming the stock was so heavily shorted by institutions that a large short squeeze could occur. Gill accumulated shares and stock options beginning in 2019, sharing his insights and activities with the WallStreetBets board.
In January 2021, former Chewy Inc. (NASDAQ: CHWY) CEO Ryan Cohen joined the GameStop board, which sparked the short squeeze. Hedge funds and retail investors piled into the stock, lowering the price and forcing short sellers to buy more shares to close out their positions. GameStop rocketed 1,500% in weeks, and several other heavily shorted stocks such as AMC, Blackberry Inc. (NASDAQ: BB) and Bed Bath and Beyond Inc. joined the action with their short squeezes.
Meme stocks saw drastic price movements into Q2 of 2021, but the mania began to fade at that point, and many of these stocks crashed down hard from their peaks. For example, AMC reached a high of over $72 per share in May of 2021 but was back trading under $15 by the end of the year.
Meme Stock Terms to Know
You may read and hear about some particular meme stock terms. Take a look, just in case meme stocks come back into vogue:
- Short squeeze: The catalyst of most parabolic meme stock moves is a short squeeze. A short squeeze is like feedback into a microphone: it builds on itself through a loop. When a stock is shorted, the investor must borrow shares and sell them immediately, intending to repurchase them later, after the price has declined. Short sellers must scramble to buy shares to close out their positions when the price rises quickly, creating intense demand for the stock. They force prices higher as longs and shorts gobble up shares.
- Diamond hands: When someone holds a meme stock through bouts of extreme volatility, they are said to hold the shares with "diamond hands." Traders with diamond hands can tolerate the volatility and believe in the long-term goals of the meme stock trading groups.
- Paper hands: The opposite of diamond hands is paper hands. A trader with paper hands will sell shares at the first sign of trouble or volatility, which makes them a target of ridicule amongst the "true believers" in the meme stock brigade.
- Fear, uncertainty and doubt (FUD): Since many of the meme stocks had poor financials or questionable management, plenty of articles or analyst media appearances focused on the downside risk of these companies. Meme stock traded considered this type of media to be FUD, a catch-all term to describe any pundit, investor or institution that didn't believe in the meme stock thesis.
Examples of Meme Stocks
The original meme stock, GameStop, is a brick-and-mortar video game retailer that many meme stock traders remember vividly from childhood. GameStop shares rose from around $20 to over $400 in a few weeks, kicking off the meme stock craze.
Another heavily shorted childhood favorite, AMC, was on sketchy financial ground as moviegoers turned to streaming services over theaters. AMC CEO Adam Aron leaned into the meme stock craze, announcing several ventures appealing to meme stock traders (while quietly unloading his own shares at elevated prices).
Another troubled retailer, Bed Bath & Beyond Inc. (NASDAQ: BBBY), also benefited from a short squeeze in early 2021. Unfortunately, BBBY remains in financial peril and has struggled to find a buyer for its declining business.
Is the Meme Stock Craze Over?
While meme stocks remain popular trades in certain sections of social media and the internet, the days of meteoric gains are probably over. Remember, these companies were shorted for a reason. Many of them had faced declining revenue and obsolescence in the face of newer competitors, especially meme stocks in the retail sector.
You likely have missed your opportunity if you're attempting to get rich quickly on meme stocks. Meme stocks are still volatile trades, and proper timing can result in some fast profits. But life-changing wealth from owning GameStop or AMC shares won't be coming back anytime soon, if ever. The short squeezes are over, and all that remains are the downtrodden companies and their fanatical followers.
Meme Stocks Had Their Day, but the Fun is Likely Over
The meme stock craze of 2021 will undoubtedly be an interesting lesson in business and economics courses over the next few years, but like all memes, they have fizzled out, and most participants have moved on to something else. Stocks trending on the news will always garner attention, and financial media like CNBC certainly leaned into this craze. (Who can forget the legendary Ja Rule interview on "Fast Money"?)
Meme stocks are still volatile, and you can profit on both the downside and upside, but traders made the easy money long ago. Meme stocks today are just another form of gambling amongst risk-seeking retail traders.
FAQs
Still interested in learning what a meme stock is? Here are a few frequently asked questions about these mercurial markets.
What are the meme stocks today?
Today, the meme stocks remain the same as they were in their heyday: GameStop, AMC, BlackBerry, Bed Bath and Beyond and the like. But volatility has petered out, and many meme stocks today are down over 90% from their highs during the mania. If you want to invest in meme stocks long term, you better have an excellent reason for an unexpected turnaround in the underlying businesses.
Are meme stocks real investments?
Meme stocks aren't long-term investments since most are downtrodden companies with heavy short interest. Meme stocks are best used as short-term trading vehicles for quick profits, especially today, now that media attention and social media "virality" has faded into the background.
