What Are Meme Stocks?

Where do I even begin with this subject? Meme stocks rose to prominence in early 2021 during the Reddit short squeeze event. There are some conflicting thoughts on what a meme stock really is in the investing community. The cleanest definition that checks all of the boxes is a stock that has a following on social media and amongst retail investors who use social media as a place to discuss investing. It seems vague, but that is because meme stocks have encompassed a wide variety of companies over the last year. What are some other characteristics of a meme stock? These don’t apply to every example, but a majority of them will have at least a couple of these factors.

Meme Stocks Nostalgia

Meme Stocks

Meme stock investors are often quite nostalgic for companies that were once thriving. I think you can think of a couple of retail brands that I’ll discuss later on.

But other than those, nostalgic meme stocks include names like Blackberry, Bed Bath and Beyond, and Nokia. Just think BANG stocks.

Just take a quick read of those three names and you’ll see exactly why nostalgia is an important characteristic. It’s almost a case of trading ironically, to see how much these groups can elevate these forgotten stocks. 

Meme stocks basically fly based on social media posts. People love to pump up stocks. However, make sure you’re not a bag holder if you get caught up in the FOMO of it all.

That’s where it can really bite you. But more on that later.

Short Percentage

This is a big one. One of the predicating factors of the meme stock revolution has been to raise the price of a stock through a short squeeze. What’s the best way to do this? Find stocks with highly shorted positions against them, and buy those shares until short sellers are forced to close their positions. It is an interesting short selling strategy, to say the least, but as we have seen, it can work. As we are also seeing right now, it can have dire consequences in the long run.

Meme Stocks and Volatility

Volatility in meme stocks is like a chicken and an egg scenario. Is the stock volatile because it is a meme stock or is it a meme stock because it is volatile? Either way, meme stock investors seem to embrace the turbulence and live for the double-digit swings in either direction. This is why they’re considered the most volatile stocks.

What Are the Best Known Meme Stocks?

The list of meme stocks seems to get longer each week. Whichever ticker symbols are trending or being discussed in groups like r/WallStreetBets become meme stocks. Here are a couple of obvious meme stocks and a couple that you might not even realize are.

Meme Stocks: GameStop (NYSE: GME)

Meme Stocks

Some might call this the king of meme stocks. As we all know, GameStop is a video game retailer that flipped Wall Street upside down in January of 2021. Before its ascent to meme stock status, it was trading for less than $5.00 per share.

When some traders in r/WallStreetBets looked into the short position against GameStop, they realized what could be done. In just a few weeks, GameStop hit an unimaginable all-time high price of $483.00 per share. 

The stock has fallen back down to Earth and currently trades at around $100 per share. Most would say that this is still an over-inflated price.

GameStop is undergoing a massive digital transformation that will likely see a shift in its business. Whatever the company one day becomes, the stock GME will always be known as the one that defeated Wall Street. 

Meme Stocks: AMC (NYSE: AMC)

GameStop’s main running mate has always been the theater chain, AMC. While AMC’s stock has never reached the heights of GameStop, it arguably has a strong legion of followers AMC Apes are all over social media and they have even named CEO Adam Aron the Silverback.  AMC was on the verge of bankruptcy due to the pandemic, but a couple of short squeezes saved the company. The company is still trying to hang on as the pandemic continues, but the stock has erased most of the gains it has made over the past year. 

Tesla (NASDAQ: TSLA)

Meme Stocks

Yup, the great Tesla is also a meme stock. Well, kind of. Tesla is just popular everywhere: on Wall Street and in Reddit forums. It might be one of the only stocks that both sides of the argument agree on.

Tesla gained notoriety in Reddit forums after its stock split in 2020. Since then, countless retail investors have made or broken their accounts trading Tesla. Call options are especially popular with Tesla’s stock since it has the tendency to surge on any given day. 

Tesla’s CEO, Elon Musk, has also become a popular figure in the meme stock story. Musk has been vocal about meme stocks in the past and one of his all-time popular tweets was just the word ‘gamestonks’. Tesla is often the highest trending stock on Twitter and in Reddit forums and is a stock that retail traders continue to rally around. 

Palantir (NYSE: PLTR)

I’m not exactly sure why Palantir was adopted as a meme stock. Some people say it is because the company is anti-establishment and plays by its own rules. Others say it is because Palantir went public at such an affordable direct listing price, that retail traders could buy into the stock. Whatever the reason, Palantir has become a very popular stock amongst social media traders.

Palantir is a data analytics company that offers its Foundry and Gotham platforms to both government and commercial businesses. The company was founded by former PayPal founder Peter Thiel and the current CEO Alex Karp. Will Palantir ever become the company that investors believe it can be? That remains to be seen but several big investors, including Ark Invest’s Cathie Wood, hold significant positions in the stock. 

Are There Meme Cryptocurrencies?

Crypto

Absolutely! In fact, there’s actually a much larger number of meme coins than there are meme stocks. These are other assets that Elon Musk loves to pump up through social media, most notably DogeCoin.

Other popular meme coins include Shiba Inu Token and any coin that has the name of Musk’s dog, Flloki, in the name. 

Meme coins are popular because of the potential gains you can make from them.

Many of them trade for under a penny each, so you can theoretically amass millions of coins for a small price.

They are mostly useless until someone like Musk mentions them. The social media effect has been so strong that it has literally made millionaires overnight. 

What Is a Short Squeeze?

The ultimate goal of many meme stocks is to initiate a short squeeze. But what exactly does this mean? First, the stock must have a large number of short-sellers that are banking on the stock’s price to fall. These short sellers will borrow shares against the stock and attempt to buy them back at a cheaper price. I already mentioned this as an important characteristic of a meme stock earlier and now you can see why. 

Once the stock has been targeted, the fastest way to execute a short squeeze is to buy up the shares at market price. This follows the laws of simple supply and demand: the fewer shares available, the higher the demand. The stock’s price will rise and short sellers will quickly need to close their short positions. If they don’t, their potential loss could be unlimited at this point.  

To close the short position in the stock, short-sellers need to buy their own shares of the stock. This creates an environment where all of the shares are being bought at the same time, sending the price to the moon. This is exactly what happened with the GameStop and AMC short squeeze in 2021. 

Is the Meme Stocks Craze Over?

It depends who you ask! In theory, as long as there are shorted stocks, there can always be a meme stock short squeeze. Unfortunately for Apes, GameStop and AMC have lost most of the gains they made during the squeezes. The key to being an Ape is to have diamond hands, which means you hold the stock until the MOASS or Mother of All Short Squeezes takes place. While the cause might be admirable, these traders have also lost out on massive gains. 

In my opinion, the reason for the meme stock revolution was to liquidate institutional short sellers. In this way, the movement succeeded. But to think it will continue to happen might be a bit too much to ask for. Hedge funds will likely be more careful with the stocks they build short positions against. This means that the Reddit Rebellion was likely a once-in-a-lifetime opportunity. 

But meme stocks and social media trading is likely here to stay. I wouldn’t ever count out an army of retail traders in the future. With tens of millions of members in r/WallStreetBets, all it takes is for one stock to be shorted for the entire army to buy in. Look at the meme stock craze as more of a message from retail traders to hedge funds. The stock market will always be tipped in the favor of big money, but the little guy is finding ways to fight back. 

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