What Are Meme Stocks? - NerdWallet

What Are Meme Stocks? – NerdWallet

Meme stock definition

A meme stock is a share of a company that quickly jumps in price due to the attention of a dedicated online following. Meme stocks usually gain popularity through discussion threads on community forum sites such as Reddit and social media platforms. The first successful meme stock was GameStop Corp (GME)

How meme stocks work

Without their cult followings, meme stocks are not necessarily valuable assets. These online communities, such as the popular Reddit thread WallStreetBets, coordinate buying and selling efforts to influence stock prices. With enough online support, meme stocks can maintain elevated stock prices regardless of the underlying company’s worth.

Part of the motivation behind the online support for certain meme stocks comes from hedge funds’ short positions in those companies.

Hedge funds are types of investments that pool money together from wealthy investors, and short selling is when you borrow shares from a broker and immediately sell them with the hope that the stock price will fall. If it does, you can repurchase the shares at the lower price, return them to the brokerage and keep the difference as profit.

But the stock price may rise instead of fall. So if you sell the stock you borrowed for $10, and then its price rises to $50, you’re responsible for those shares, meaning you’re on the hook for that $40 you owe the broker. And if the stock price rises to $500, you’ll owe that difference.

Meme stock history

When GameStop exploded in value in January 2021, hedge funds — betting on its failure — found themselves in that position. In August 2020, Reddit user Roaring Kitty posted a video outlining game retailer GameStop’s plans to revamp its business model

When online investors understood the short positions against GameStop, people took it on as a Robin Hood-like adventure (often using the trading app Robinhood to do so). As a result, hordes of investors started buying GameStop stock, making it very expensive for the hedge funds to buy back from their short positions.

After the GameStop incident, some hedge funds suffered significant financial losses, while some retail investors made millions. Other meme stocks emerged after GameStop, some with varying degrees of success.

People learned major investing lessons during the craze, whether investors made money from meme stocks or not. According to the Schwab Q1 Trader Sentiment Survey, 35% of Charles Schwab and TD Ameritrade traders are more aware of their risk tolerance and factor it in before making momentum-based trades after the meme stock frenzy. And 22% are more careful about the sources they use for their investment research; additionally, 15% are more careful about diversifying their portfolios.

Meme stock examples

GameStop may have started the meme stock mania, but others have followed in its footsteps. The following companies have also been considered meme stocks:

  • AMC Entertainment Holdings Inc. (AMC).

  • Bed Bath & Beyond Inc. (BBBY).

  • Robinhood Markets Inc. (HOOD).

  • Vinco Ventures Inc. (BBIG).

Terms connected to meme stocks

Meme stock investors have developed a particular vernacular when it comes to investing. Here are some terms you may stumble upon if you spend time on WallStreetBets or other similar forums:

  • ATH: An abbreviation for “all-time high.”

  • BT(F)D: An abbreviation for “buy the (f——) dip.” Refers to buying the stock “on sale” when prices are low. Learn more about buying the dip.

  • Diamond hands: This refers to an investor who will hold onto a stock despite significant losses.

  • Paper hands: The opposite of “diamond hands,” paper hands are more likely to sell their shares  — often to the ridicule of diamond hands.

  • Tendies: Slang for chicken tenders; this refers to any profits investors make from meme stocks.

  • To the moon: If a stock is going “to the moon,” users typically mean that it is rising substantially, potentially with no limits.

Can I make money with meme stocks?

While it is possible to make money with meme stocks, it is an extremely risky venture. Meme stock investing relies on trying to time the market, which humans, even those professionally trained, are notoriously bad at. It also depends on knowing which stocks will pop and which won’t — which is essentially impossible.

Some of the more popular meme stocks, such as AMC and particularly GameStop, continue to have higher stock prices than before the short squeezes in 2021. Others, such as Nokia, are trending similar to pre-pandemic lows.

Risking money in speculative investments can be exhilarating, but it is rarely the path to long-term wealth. Investing in low-cost index funds and through tax-advantaged retirement accounts such as IRAs has a higher likelihood of success than relying on risky investing strategies.

If you’re thinking about buying and selling meme stocks, keep in mind that you will probably have to pay taxes on your profits. Capital gains tax rates are especially high on stocks you held for less than a year.

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