What are Meme Stocks?

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Explaining Meme Stock Meaning

When we try to explain meme stock definition it is a term that describes the shares of a company that have become very popular online, especially on social media platforms. These platforms allow people to share their opinions, research, and memes about certain stocks. Memes are ideas or elements of popular culture that spread quickly and widely on the internet. They can be funny, interesting, or sarcastic videos, images, or posts. Meme stocks often attract a lot of attention and discussion on websites like Reddit and platforms like X (formerly Twitter) and Facebook. These online communities can influence the prices of these stocks by buying and holding them with strong hands. Meme stocks may not reflect their true value based on fundamental technical analysis.  

Also Read: Defensive Stocks

How Meme Stocks Work?

Meme stocks are not a new phenomenon. In the late 1990s and early 2000s, there were websites and chat rooms that promoted and hyped up dotcom stocks—a bubble that eventually burst and caused a lot of economic damage. However, meme stocks became more prominent in the year 2020 through the Reddit forum r/wallstreetbets. This forum is known for its unconventional and often irreverent tone. In this and other forums that have emerged since, users collaborate to identify target stocks and then promote them, while also investing their own money.

Unlike online schemes that try to cheat unsuspecting investors by artificially inflating and dumping stocks, the promotion of meme stocks mostly involves buying and holding them even after the price rises.

Also Read: Treasury Stock

How GameStop Became the First Meme Stock

GameStop Corp. (GME) is a video game retailer that was struggling to survive in the digital age. In August 2020, a YouTube personality named Roaring Kitty made a video that argued that GameStop’s stock could rise from $5 to $50 per share. He said that the stock was heavily shorted by hedge funds, which meant that they were betting that the price would go down. He also said that if the price went up, the hedge funds would have to buy back the shares to cover their losses, creating a short squeeze that would push the price even higher. A few days later, Ryan Cohen, the former CEO of Chewy.com and an investor, bought some GameStop shares and tweeted about it. In November 2020, it was revealed that he owned 10% of the company.

On Jan. 12, 2021, he joined the board of directors and the stock started to soar. By Jan. 14, the stock had doubled in value; an 8x increase from when Cohen and Roaring Kitty first posted about it. The short squeeze hurt many hedge funds, some of which had to close down because of their losses. The meme stock phenomenon was born, with a theme of taking money from the rich Wall Street elites and giving it to the small retail investors.

What Are Some Other Meme Stocks?

GameStop was the first meme stock that became famous online, but it was not the only one. Users of WallStreetBets and other forums also found other stocks that were unpopular and heavily shorted by hedge funds. They decided to buy and promote these stocks to make them go up in price. Some of these stocks were AMC Entertainment Holdings Inc. (AMC), the movie theatre chain that suffered from the COVID-19 pandemic, and Blackberry Limited (BB), the old-fashioned smartphone maker. Both of these stocks also increased by a lot in a short time.

Some users also joked about how funny it was to see these old and struggling companies rise again in the stock market.

Not all meme stocks did well, even with some short squeezes. Some other examples of meme stocks are Bed Bath & Beyond Inc. (BBBY), Koss Corp. (KOSS), Vinco Ventures (BBIG), Support.com, and even Robinhood Markets Inc. (HOOD), the online broker that allows meme stock trading.        

How to Speak Meme Stock

Meme stock communities have their own language that they use online. Some of the words and phrases they use are (with emojis that they use online):

  • Apes: The members of the meme stock community. Some people say this comes from a meme related to the movie Rise of the Planet of the Apes, but others say it comes from the idea of “dumb apes” working together to fight against the Wall Street elite.
  • BTFD: This stands for “buy the f***ing dip.” This means buying more of a stock when its price goes down in the short term and doing this again after every drop.
  • Diamond hands:  This means holding on to a stock no matter what, even if it loses a lot of value, because you believe that the price will go up soon.
  • FOMO: This means “fear of missing out.” This is when you feel like you have to join the meme stock wave or else you will regret it later.
  • Hold the line: This is a way of encouraging others to keep their diamond hands and not sell their stocks when the price is volatile.
  • Paper hands: This is an insult for those who do not have diamond hands. These are people who are weak and sell their stocks too soon.
  • Stonks: This is a funny way of spelling “stocks.” This meme was around before WallStreetBets and it shows a poorly drawn bald man in a suit looking at an arrow pointing up in price.
  • Tendies: This means profits made from meme stocks. It comes from chicken tenders, a fast-food item that some people associate with rewards or treats. 
  • To the moon: This means that a stock will go up very high, as high as the moon. 
  • YOLO: This means “you only live once.” This is a way of saying that buying a meme stock is worth the risk.

Also Read: CANSLIM Stocks

How Meme Stocks and Short Selling Are Related

Meme stocks are stocks that become very popular online, especially on social media platforms. They often have a lot of short sellers, who are people who sell shares that they borrow, hoping to buy them back later at a lower price. Short selling is a way of betting that the price of a stock will go down. Short sellers have to pay interest and fees to borrow the shares, and they also have to cover their losses if the price goes up.

Sometimes, the price of a heavily shorted stock can go up very fast because of a short squeeze. A short squeeze is when many short sellers have to buy back the shares at a higher price to close their positions. This can happen because of margin calls, which are when brokers demand more money from short sellers to cover their losses. When many short sellers buy the shares at the same time, it creates more demand and pushes the price even higher.

GameStop was the first meme stock that had a huge short squeeze. GameStop (GME) is a video game retailer that was losing money and customers. Many hedge funds and other investors were shorting the stock, thinking that it would go bankrupt. The short interest was more than 100% of the shares available. Some online investors, such as Roaring Kitty on YouTube and users of Reddit’s WallStreetBets forum, saw an opportunity to make money by buying the stock and driving up the price. They also got support from some famous investors, such as Michael Burry and Ryan Cohen, who bought large stakes in the company.

The online investors bought shares and call options, which are contracts that give the right to buy shares at a certain price in the future. This increased the demand and the price of the stock. The hedge funds and other short sellers had to buy back the shares at a higher price to limit their losses. This caused a massive short squeeze that made the stock price go from less than $5 a share to $325 (by January 2021) in less than six months.

A Summary

In early 2021, some stocks became very popular among online investors who followed the trends of internet memes on social media. These stocks, known as meme stocks, were often targeted by traders who wanted to make a quick profit by forcing the prices to go up. However, many of these stocks belonged to companies that had weak financial performance and uncertain future prospects.

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