During the height of the Covid pandemic, meme stocks were all people could talk about for months. While the popularity hasn’t been the same post-pandemic, they’ve started making a comeback after famous financial influencer Roaring Kitty posted for the first time in three years.
After announcing he’d made a $116 million investment in GameStop, shares surged more than 75%. With this renewed interest in meme stocks, we felt it was essential to help you understand exactly what a meme stock is and whether they are good investments.
Defination Of Meme Stock
Meme stocks are companies that have gained immense popularity due to online communities like Reddit and other social media platforms. Influencers within these communities are typically retail investors using a personal brokerage account like Robinhood to buy and sell stocks. These investors targeted companies that hedge funds heavily shorted in an attempt to create a short squeeze. Because of the buying activity this created, short sellers were forced to exit their positions, sending the price even higher.
Some of the biggest Meme stocks were AMC Theaters, Bed Bath & Beyond, and Game Stop. Early in 2021, AMC was trading at less than $10 per share, but within a one-month period, shares touched close to $400 a share.
One of the most popular stories of the original Meme stock craze was when the popular hedge fund Melvin Capital suffered massive losses from its short position in GameStop. This caused Melvin Capital to secure outside investment to stay afloat, leading to congressional hearings.
What is a Short Squeeze?
It’s important to understand what a short squeeze is to fully understand what happened during the meme stock movement. Here’s a detailed breakdown.
The Company’s Stock is Shorted
Based on fundamental or technical factors, an investor feels a company’s stock price is overvalued. This causes them to take on a short position in the company. Essentially, short sellers borrow shares from a broker so they can be sold. Then, hoping the stock price falls, they can purchase them back at a profit.
The Stock Price Rises Instead of Falls
However, when a short squeeze occurs, the stock price rises instead of falls. This is exactly what happened during the Meme stock movement. Retail traders looked for companies with heavy short volume and encouraged others to buy and “shoot for the moon.” This buying wrecked havoc on hedge funds that had bet against these companies.
Short Positions Must Cover
Short sellers are forced to exit their positions when the price starts rising instead of moving as they had planned. The higher the price goes, the more money they stand to lose.
Continued Buying Led to Short Squeezes
As retail investors continue purchasing shares of meme stocks and short sellers cover their positions, the prices continue to rise. However, the buying process will often end, and the prices will suffer significant losses.
Meme Stock Terminology To Know
You probably came across quite a bit of terminology if you followed the WallStreetBets Reddit page during the Meme stock craze. Here’s a quick rundown of some of the more popular terms.
- ATH: This abbreviation means “all-time high.”
- Bagholder: This referred to someone still holding their position in a stock even though it had declined significantly.
- BANG: WallStreetBets Redditors would use BANG to refer to the biggest meme stocks: BlackBerry (BB), AMC Entertainment (AMC), Nokia (NOK), and GameStop (GME).
- BTFD: This was a common reference on Reddit for people to “buy the f***** dip,” meaning that when a stock price declined, you should purchase more shares.
- Diamond Hands: Even though a stock price might decline significantly, you should continue holding without feeling the pressure to sell.
- Hold The Line: Very similar to diamond hands, people would say hold the line when they wanted others to maintain their position even when the stock price was falling.
- Paper Hands: The opposite of diamond hands would be paper hands. This person can’t handle the stock’s decline in price and decides to sell. Diamond Hands frequently made fun of those with paper hands on Reddit.
- Tendies: This is a slang term that means making a profit.
- To The Moon: This meant a stock price would continue increasing. On Reddit, this term was frequently followed by a rocket emoji.
- YOLO: This means you only live once. It was frequently used to describe taking a gamble on an investment.
Are Meme Stocks a Good Investment?
Meme stocks were highly appealing to retail investors, largely because of the money other investors were making. Unfortunately, meme stock investing is rarely a good investment. Most of these companies fail to have strong fundamentals. Hedge funds were shorting these companies for a reason.
While some people will make money from meme stocks, it’s hard to tell when the stock prices will crash, leaving many other investors vulnerable to losing their entire investment.
What’s a Better Way to Invest Besides Meme Stocks?
Instead of investing in meme stocks with significant risk, consider investing in income producing assets like dividend stocks. By paying attention to Ziggma Stock Scores, you can find high-quality companies in a better position to help you earn a positive return on your investment.
The Bottom Line
The meme stock frenzy was the hottest topic at the beginning of 2021. Day traders and retail investors who were a part of this meme stock community would attempt to squeeze out short positions held by institutional investors by driving up the stock’s price. Unfortunately, most price movements were unsustainable because fundamentals didn’t back them.
Frequently Asked Questions
What are considered meme stocks?
Meme stocks are any company that has gained popularity due to online forums. One of the first successful meme stocks was GameStop. Other popular meme stocks included AMC Entertainment Holdings, BlackBerry, and Bed Bath and Beyond.
Why are they called meme stocks?
They were named meme stocks because memes are social media posts that tend to spread quickly within the online world.
Is NVDA a meme stock?
NVDA isn’t a true meme stock, but it’s acted like one over several months. It’s received a lot of attention quickly through online communities. However, most investors feel there are strong fundamentals that support NVDA’s strong price appreciation.
