Understanding and Trading Meme Stocks


Meme stocks are a relatively recent phenomenon in which the power of social media can influence a market, and result in a stock price soaring. 

They were brought to light in 2021 through the epic story of GameStop’s stock, which was featured in the Netflix documentary “Eat the Rich: The GameStop Saga.

Meme stocks can yield tremendous returns but can also lead to abysmal losses in a very short space of time, making them a highly volatile choice to trade.

As a trader, you need to understand the speculative dynamics and cultural codes specific to the meme stock world to trade the surge in their prices. Otherwise, your trading account might take a major hit.

KEY TAKEAWAYS

The value of meme stocks is influenced by their success on social media rather than by financial factors.

Meme stocks can experience spectacular rises, but they can also plummet sharply which makes trading them very risky.

Famous examples of meme stocks include GameStop, AMC, and BlackBerry, all of which were influenced by the online community.

WARNING

Trading exposes you to the risk of losing more than your initial investment and incurring financial liability. Trading is suitable only for well-informed, sophisticated clients able to understand how the products being traded work and having the financial ability to bear the aforementioned risk.

Transactions involving foreign exchange instruments (FOREX) and contracts for difference (CFD) are highly speculative and extremely complex. As such, they are subject to a high level of risk due to leverage. Please keep in mind that CDF trading is banned in the US.

Information published on the NewTrading.io website is for educational purposes only and should not be construed as offering investment advice or as an enticement to trade financial instruments.

What is meme stock?

Meme stocks are corporate stocks selected by investors due to the hype and discussion on social media rather than traditional financial fundamentals.

Well-meaning influencers utilize their large online following to suddenly call attention to a particular company’s stock, whether the company is a has-been in search of new glory or an unknown startup.

The ensuing media hype and speculative craze are enough to attract a wave of buyers and send the stock price soaring. The hype is on!

Accordingly, new investors are attracted by the stock’s recent performance and gradually join the movement. The price rises rapidly, social media incites a stampede, and voilà, the speculative bubble takes shape.

The gap between the company’s market and real value increases as the price progresses. Most of the time, the bubble eventually bursts, and prices fall precipitously. 

However, some companies profit from the speculative fever surrounding their stock and can appreciably improve their fundamental value, specifically through an increase in capital.

Meme stock examples

In 2021, powered by the Reddit r/WallStreetBets forum and American streamer Roaring Kitty, GameStop’s share price increased 120-fold!

ProRealTime Web graph of GameStop’s stock.


How to trade meme stocks

Meme stocks are very volatile, with extreme upward and downward price movements.

The hype created on social media resembles a treasure hunt, with influencers such as Roaring Kitty inserting encrypted messages into their social posts just for fun.

While this is entertaining, remember that trading meme stocks is extremely risky. You need to develop good habits to avoid heavy losses or indebtedness due to leverage.

If you are new to the stock market, we recommend starting with less volatile, more prudent securities. You should avoid trading meme stocks with real money. 

The best trading simulators will allow you to trade meme stocks risk-free while you gain the necessary experience.

Once you acquire that experience and develop a detailed and well-thought-out trading budget, you can consider placing some trades to capitalize on the volatility of meme stocks. 

But beware, opt for spot trading and smaller positions rather than investing in leveraged meme stocks.

You have two options: 

  • Bet that the stock price will continue to rise, i.e., that the current speculative bubble will continue, and bet that the company will experience an economic recovery.
  • Bet that the speculative bubble will burst, i.e., the stock price will fall, by placing a short position.
Noteworthy

By implementing more complex speculative strategies based on options, you could bet on other variables, such as rising or falling price volatility.

Risks specific to meme stocks

A meme stock buyer’s primary risk is that the speculative bubble will burst, causing prices to fall rapidly and precipitously.

But above all, meme stocks can also be subject to price manipulation due to their low floating capital and liquidity.

For example, a pump and dump scheme is when an investor buys a large number of shares of a little-known or low-value company before disseminating false, exaggerated, or misleading information to attract new investors and artificially raise prices (pump) only to sell all its shares at a profit (dump).

Finally, buyers are not the only ones exposed to the many risks associated with meme stocks. Short sellers can also be affected by a meme stock’s price volatility and suffer the devastating effects of a short squeeze.

Noteworthy

A short squeeze is a market phenomenon in which short sellers are caught off-guard when prices rise. They are forced to sell their positions to cut losses, creating a positive feedback loop and fueling the price surge even further.

Famous meme stocks

  • GameStop

    GameStop is a video game and electronic products chain store that enjoyed tremendous success in the 2000s before losing market share to online competition.


In January 2021, GameStop became the symbol of the meme stock movement when Reddit investors bought a massive amount of GameStop shares, triggering a short squeeze of its stock price.

  • AMC

    AMC was founded in 1920 and is one of the largest movie chains in the world. It operates thousands of movie theaters across several countries.

In 2021, AMC’s stock price was also caught up in the meme stock whirlwind. Reddit investors bought shares to prop up the company, which was struggling due to the COVID-19 pandemic and ensuing theater closures.

  • BlackBerry

BlackBerry is a Canadian company founded in 1984. Initially known for its keyboard mobile phones, BlackBerry shifted to security software and services for businesses after losing market share to modern smartphones.

Although less publicized than GameStop or AMC, BlackBerry’s stock price also drew the attention of Reddit investors.

Meme stock vocabulary

The meme stock world is full of acronyms and specific jargon: 

  • FOMO—This acronym stands for “fear of missing out” and refers to the fear of missing out on a price movement and its potential profit.
  • Diamond hands—This expression refers to high-risk-tolerant investors willing to hold a volatile meme stock at any cost, whether it rises or falls.
  • Paper hands—This expression refers to tenuous investors likely to sell the stock at the first sign of trouble.
  • Bag holders—This expression refers to buyers who keep a poorly performing stock in their portfolio in the illusory hope that it will one day rebound.
  • ATH—This acronym stands for “all-time high” and refers to the highest price ever achieved by a market. It’s the all-time, historic peak of its price!”
  • To the moon—This expression describes bullish explosions of meme stocks as if the price could shoot through the stratosphere and reach the moon.
  • Tendies—This term is derived from “chicken tenders” and refers to gains from trading a meme stock.

Although meme stocks present a media-savvy treasure-hunt appearance and a vocabulary rich in imagery, trading them presents many dangers for a beginner trader. Therefore, be careful: avoid getting burned trading meme stocks. Most of the time, they are nothing more than a flash in the pan!

author
Maxime Parra

Maxime holds two master’s degrees from the SKEMA Business School and FFBC: a Master of Management and a Master of International Financial Analysis. As founder and editor-in-chief of NewTrading.fr, he writes daily about financial trading.

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