What Is A Meme Stock? Why Is It Trending?

Summary

  • Reddit-based retail investors took on bearish analysts and caused a wild upswing for shorted stocks like GameStop (NYSE:GME, GME:US), BlackBerry (TSX:BB), etc.
  • As these stocks outgrew their investing circles and began trending on social media, they earned themselves the title of ‘meme stocks’.
  • The moniker has been around block for a few years now, and is most commonly used for stocks that are popular among millennials.

Memes are a funny thing, unless you are the unfortunate being whose one bad photography moment is now an eternal standing joke on the internet.

Meme stocks, however, are not quite the same thing.

In the last few weeks, the face-off between Reddit-based day traders and short-sellers grabbed eyeballs extensively. Retail investors, mostly communing on a Reddit forum called WallStreetBets, took on bearish analysts and caused a wild upswing for shorted stocks like GameStop (NYSE:GME, GME:US), BlackBerry (TSX:BB), AMC (NYSE: AMC, AMC:US), etc.

As these stocks outgrew their investing circles and began trending on social media, they earned themselves the title of ‘meme stocks’.

 

So, What Exactly Is A Meme Stock?

 

The moniker ‘meme stock’ isn’t a new one. It has been around block for a few years now, and is most commonly used for stocks that are popular among millennials. Having stemmed from a social media fad, it also does not come with a standard textbook definition, like growth or value stocks.

But if one were to look for some technical characteristics, a meme stock is generally overpriced and reflects rapid spikes of growth over a short period of time.

©Kalkine Group 2021

 

Some market commentators opine that meme stocks have a tendency of being highly volatile, with their valuations being generally based on their projected potential instead of their financials or future perspectives.

In GameStop’s case, many argue that the stock price growth was not based on its potential either, but was rather an act of bullish traders “taking advantage of the system”.

On this note, some even say that a meme stock is one that is fueled by the typical social media influence of FOMO (fear of missing out). Ironically, the Reddit-boosted stocks were even being advertised with #YOLO (you only live once).

While rapid-buying at the peak of a hype is a common feature among meme stocks, reports say that so is panic-selling at the slightest headwind.

The most famous meme stock of recent times, GameStop saw its dizzying rally come to a screeching halt around the first week of February as the stocks dwindled below its US$-100 milestone level.

 

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