Meme Stocks: Meaning Examples & Investing Risks

A meme stock refers to the shares of a company that have gained viral popularity due to heightened social sentiment. This social sentiment is usually due to activity online, particularly on social media platforms. These online communities can dedicate heavy research and resources toward a particular stock. Meme stocks often have heavier discourse and analysis in discussion threads on websites like Reddit and posts to followers on platforms like X (formerly Twitter) and Facebook.

Though some believe meme stock communities coordinate efforts to influence the prices of those shares, meme stock shareholders are often an unorganized set of independent individuals, each with their own investment views and preferences. Collectively, their independent actions have been shown to initiate short squeezes in heavily shorted names. As a result, meme stocks can become overvalued relative to fundamental technical analysis.

Understanding Meme Stocks

A meme is an idea or some element of popular culture that spreads and multiplies across people’s minds. Memes gained increasing prevalence and relevance as the internet and social media grew. They allow people to rapidly spread humorous, interesting, or sarcastic videos, images, or posts to others around the world. The rapid and multiplicative effect of sharing such posts could make them go viral.

With the internet, chat rooms and discussion boards devoted to investing and promoting stocks also arose. In the late 1990s and early 2000s, these sites helped promote and drive up the prices of so-called dotcom stocks—a bubble that famously burst with far-reaching economic consequences.

Meme stocks, however, didn’t truly emerge until the year 2020 via the Reddit forum r/wallstreetbets. Unlike its predecessors and other investing message boards, WallStreetBets became known for its unconventional and often irreverent tone. In this and other forums that have popped up since, users work together to identify target stocks and then promote them, while also putting their own money to work.

Unlike online pump-and-dump schemes aimed at defrauding unwitting investors, the promotion of meme stocks largely involves buying and holding with the above-mentioned strong hands even after the price spikes.

GameStop: The First Meme Stock

The YouTube persona Roaring Kitty posted a future viral video laying out the case for why shares of brick-and-mortar video game retailer GameStop Corp. (GME) could soar from $5 to $50 per share in August 2020. In the video, he explained that the stock had among the highest short interest in the market, largely with short positions held by hedge funds—and that these funds would need to cover their positions in the event of a massive short squeeze, driving the stock much higher.

A few days later, the former CEO of Chewy.com and investor Ryan Cohen purchased an unknown amount of GME stock, which Gill acknowledged on Twitter (now X). In November 2020, it became public knowledge Cohen owned a 10% share in the company. On Jan. 12, he joined the board and the stock rose rapidly. By closing two days later, the value doubled; an 8x increase from the price at the time of Cohen’s and Gill’s previous posts.

Then, in January 2021, the short squeeze that The Roaring Kitty had suggested earlier took place in earnest, with the price of GME shares exploding to nearly $500 amid a frenzy of short-covering and panic buying.

The main victims of the squeeze ended up being a handful of hedge funds, some of which were forced to shut down due to heavy losses. As a result, the meme stock concept adopted a David vs. Goliath or Robin Hood connotation of taking from the rich Wall Street elite and rewarding the small retail investor.

GME Is Squeezed Again

After the initial meme stock craze, GameStop shares drifted steadily lower, settling at just over $10 a share by the Spring of 2024. However, in mid-May of that year, the stock experienced a sudden resurgence, fueled by the return of Keith Gill, aka "Roaring Kitty," to social media. Gill, who had been largely absent from the public eye since the height of the meme stock frenzy in 2021, posted a cryptic image from his X account, which was viewed over 24 million times, followed by a series of movie-inspired video memes.

While not making any recommendations or indications about GME or any other stocks, these posts nevertheless reignited frenzied interest in meme stocks, causing a massive surge in trading volume and price. GameStop shares skyrocketed nearly 100% on Tuesday, May 14, 2024, following a 74% increase the previous day. This rapid price appreciation caught short sellers off guard, resulting in significant losses estimated at over $1.3 billion in just the two days following Gill's tweets alone.

The renewed meme stock rally also extended to other companies, such as AMC Entertainment, which saw its stock price jump 120% in early trading on Tuesday. AMC took advantage of the heightened interest by raising approximately $250 million through a share sale.

Market analysts and observers drew parallels between the 2024 rally and the original meme stock phenomenon of 2021. However, opinions were divided on whether this new surge would have the same lasting impact or if it was simply a brief revival of the speculative fervor that had characterized the earlier event. Regardless, the sudden resurgence of meme stocks in May 2024 served as a reminder of the unpredictable nature of markets and the power of social media to drive investor behavior.

A Meme Stock Glossary

Meme stock communities have developed a specific lingo used in their posts online. Some of these terms include (along with emojis used to denote them online):

• Apes: Members of the meme stock community. Some have attributed this to a meme related to the movie Rise of the Planet of the Apes, but others have suggested that the label comes from the banding together of “dumb apes” to take on the Wall Street elite.

• BTFD: An acronym for "buy the f***ing dip." Buying the dips means going long on a stock after its price has declined in the near term and is meant to be repeated after each such drawdown.

• Diamond hands: This has come to mean holding onto a stock despite (even heavy) losses, confident that the price will eventually increase.

• FOMO: "Fear of missing out," that if you don’t catch the meme stock wave, you’ll regret it.

• Hold the line: a battle cry to encourage others to stand firm with diamond hands in the face of volatility.

• Paper hands: This is a derogatory slur leveled against those who fail to maintain diamond hands. These are perceived as weak individuals without conviction who sell their shares too quickly.

• Stonks: An ironic misspelling of the word “stocks.” This meme predates WallStreetBets and often depicts a crudely designed bald man in a suit staring blankly at an arrow pointing upward in price.

• Tendies: Short for chicken tenders, "tendies" refer to profits made in meme stocks. There are several claims for why this fast-food item is used for collecting profits.

• To the moon: The idea that a stock will rise extraordinarily high, as if to the moon.

• YOLO: "You only live once," so why not buy into a meme stock?

Other Developments

Meme stocks have been a boon to investors, day traders, and brokerage platforms but companies have also capitalized on the meme stock phenomenon. As a result of sky-high prices and persistent demand for shares among individual investors, AMC Theaters CEO Adam Aron took advantage of the elevated valuation and engaged in a series of secondary (follow-on) offerings in 2021. This raised more than $1.5 billion in the first quarter (Q1) from voracious meme stock buyers.

GameStop followed suit in 2021, raising nearly $1.7 billion via a secondary offering of 8.5 million additional shares at an average price of more than $200 per share.

In 2022, Bed Bath & Beyond announced intentions to sell 12 million shares in a secondary offering as meme stock promoters pumped the value of its stock. However, the stock fell steeply following the company's announcement of the plan.

Meme Stocks and Short Selling

One of the features of meme stocks, especially early on, has been that they tend to be heavily shorted names. This means that there is a lot of short interest in the stock, or that a large proportion of the company's outstanding shares have been sold short.

Short selling is when somebody sells shares that they do not own, hoping to buy them back at a lower price. It is thus a bet that prices will go down. That seller must borrow shares from somebody who is long the stock in order to sell them. As more and more shares are sold short in this way, there are fewer shares left available to borrow. Once a stock becomes hard to borrow, even the most motivated short seller may be unable to do so. You may alos read this: Advantages Of Long-term Stock Ownership

Short Squeeze

Stocks are sold short on margin (because they involve borrowed shares). As the price of the shorted stock rises, the short seller will begin to experience losses. These losses must be covered in a timely fashion, often prompted via margin calls, whereby the broker demands funds to make up for those paper losses.

Ultimately, a short seller may run out of available funds to hold on to the short and will be forced to buy back the shares at a higher price and close out the position. If many shorts are forced to cover at once, it adds additional upward pressure on the stock's price as they are all forced to buy the stock and cover at ever higher prices. This is known as a short squeeze, and it accelerates a stock's price increases as more and more short sellers are forced to bail out to cut their losses.

Why Are They Called Meme Stocks?

A meme is an idea that spreads rapidly among people. Memes began to take the form of humorous social media posts and viral videos with the advent of the internet. Meme stocks are so-named because ideas about them spread rapidly on social media and web forums. Meme stocks also see communities built around them that promote the hype and elaborate on the original meme, inventing specific terms and symbols to accompany the stock.

Is There a Meme Stock ETF?

Roundhill Investments came out with a meme stock-focused ETF in December of 2021 under the ticker symbol 'MEME'. MEME features an equal-weighted portfolio of 25 stocks based on social media popularity and market sentiment. Eligible securities are initially given a social media activity or “meme” score, the number of times a firm or its ticker is mentioned on specific social media platforms over a trailing 14-day period, with consideration paid to their short interest. The top 25 such firms are included in the portfolio, which is re-examined and rebalanced twice a month.

Single stock ETFs have also recently been introduced, which provide leveraged long or short positions on a single stock. Only a small number of these have been approved for trading so far, but do include some meme stocks like Tesla and NVIDIA.

Are Meme Stocks Real Investments?

Meme stocks are actual stocks listed on exchanges and available for trade. In that sense they are real. However, critics argue that their price performance and appeal have little to do with their fundamentals and much to do with their entertainment value as speculative playthings, much like casino games.