Are meme stocks talk of the town?

Summary

  • Meme stock is a stock that has seen a rise in volume due to social media frenzy and retail investor interest.
  • These stocks can experience a considerable increase in their share prices in a very short period.
  • GameStop, AMC and Blackberry are few examples of meme stocks.

Meme stocks are equities that have recently experienced a boom in viral activity, which is typically fueled by online social media sites like Reddit and Twitter. Retail investors in social media discussion groups have come together to look for equities with significant short interest levels.

Meme stocks earned their title from the surge in trading activity that resulted from social media interest and marketing.

Source: © Michaelvi | Megapixl.com

Retail investors are driving the surge in meme stocks, which is fueled by a social media craze. Online forums debating the upcoming big stock have come to power, reaping life-changing profits for these odd winners.

How do these stocks work?

As per a member on the WallStreetBets site, the following phases describe how meme stocks function in the stock market.

  1. A firm is seen to be undervalued by a group of retail investors, who begin to put buy orders.
  2. Other traders become interested in the stock and engage in the process. Subsequently, its share price rises even more.
  3. The stock becomes popular on social media and other internet venues. Investors that are late to the game buy all their shares at once, fearing that they will miss out on prospective profits. At this point, short-sellers also come in.
  4. Buying surges after a few days, and early buyers start cashing out. The selling phase, like the purchasing phase, grow into a chain reaction as people are afraid of losing money. This is the point at which the price drops.
  5. After the price crashes, the stock might witness reduced trading activity for some time until buyers regain interest in the stock.

The rally of meme stocks

AMC Entertainment, a US-based cinema operator and GameStop, an American video game retailer, two formerly troubled equities, have recently been in the headlines as they became twice their value in no time.

Gamestop’s share price has rallied over 1100% year to date as of June 11, 2021. While AMC’s share price observed over 500% rise in its stock price in the month of May 2021, Blackberry (enterprise and security software services provider) shares soared by more than 50% in the same month.

DO READ: GameStop (NYSE:GME) Zooms By 47% as Meme Stocks Rally

The unexpected rallies in meme stocks may provide investors with rich profits in a matter of seconds. However, the tremendous volatility that comes with them may easily catch traders off guard, putting them in a tough situation when shares plummet.

ALSO READ: Meme Stocks Can Backfire, Just Look At Hertz

GameStop's stock dropped over 27% on June 10 after it caught the eye of the Securities and Exchange Commission, which has demanded papers from GameStop and others to investigate what caused the unusual short squeeze in specific companies that began in January and continued into June. Blackberry and MicroVision also saw a fall in interest in the last week as compared to the week before.

However, certain meme stocks and their social media mentions, had regained their dominance by June 11.

Though meme stocks have recently gained a lot of interest, taking a more diversified approach and long-term strategy can help investors more.


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