Meme Stocks: What it means? Should I invest in it?
The meme stock fiasco has caused the price of GameStop Corp. (NYSE:GME), a global video game retailer, to skyrocket to $483 per share as of January 28, 2021, an increase of almost 190 times compared to the low of $2.57 in just nine months. The so-called "meme stock phenomenon" began in 2020 and has helped to rescue a few long-established companies from the difficulties caused by the global COVID-19 pandemic and the wave of technological transformations. But what exactly are they? Please continue reading!
What are meme stocks?
Meme stocks are real stocks that are available for trade on the listed exchanges, with famous examples including GameStop Corp., Tesla, Inc., Bed Bath & Beyond Inc., and AMC Entertainment Holdings, Inc..
However, meme stockholders don’t really care about the products and services in which the target companies expertise, or whether the companies are with promising pipeline projects. Instead, they speculate the target stocks purely based on spree or even revenge to pump their prices to cause short squeezes, during which many investors bet against a stock to shoot up its price. By doing so, the stock prices will be volatile heavily.
In this situation, if the stock price has risen, it will cost short sellers (mostly institutional investors) more to buy back the shares, incurring a loss.
Meme stocks fever started in 2020, predominantly on Reddit, especially from the subgroup: r/wallstreetbets, and the boom was in line with the onset of the COVID-19 pandemic.
Since then, the U.S. Securities and Exchange Commission, SEC) has described the trends as a "meme stock phenomenon". And, the media even described the scenario as a war between Reddit users, and the whales of Wall Street.
According to an SEC report, although some hedge funds had big losses at that time, they were not widely affected by the meme stocks phenomenon.
Top meme stocks
Due to the meme-stock rally in recent years, below are some of the famous meme stocks that get benefited from the hype:
1. GameStop Corp. (NYSE:GME)
GameStop Corp.’s performance was hit hard by the technological waves in addition to its failed investments during the 2010s.
Until 2021, retail investors noticed that the short interest well exceeded the float, they launched a coordinated buying spree online to pump the price, making the company’s stock skyrocketed to $483 from the low of $2.57 in 2020, and the company is now ranked 521st on the Fortune 500.
Since retail investors hoped to push up the price, making institutional investors buy back the shares at the higher price. Meanwhile, the institutional investors planned to short sell the stocks at a lower price than what they originally paid for. Hence, the event was portrayed as a battle between the group of people by the media.
2. AMC (NYSE:AMC)
As the world's largest movie theater chain of more than 100-year history, AMC has once closed all theaters and furloughed all of its 600 employees, including CEO Adam Aron, during the COVID-19 pandemic in 2021.
However, AMC was offered a ray of hope by the Reddit community because of a series of coordinated short squeezes, which resulted in Silver Lake and Wanda the investors converting its $600 million debt holding and Class B shares to equity and Class A shares respectively. Since then, AMC’s price surged 300% to a peak of $20.36 on January 27, 2021.
Until now its shares had soared 2,421% even though most of the cinemas were largely shut during the pandemic.
Last year, AMC announced that they would reopen most of their theaters. Meanwhile, they took Wall Street by surprise by launching a special dividend, named “APE”, which is a term that the meme stockholders often described themselves.
3. Bed Bath & Beyond Inc. (NYSE:BBBY)
Bed Bath & Beyond, an American chain of domestic merchandise retail stores, has struggled for years with shrinking sales with tight competition against Amazon (AMZN.O) and other rivals, making its shares fall 83% in 2022 alone.
Moreover, it's expected that the net loss for its fiscal quarter ending in November would reach $385.8 million, including $100 million of impairment charges.
Therefore, the company warned that it may not be able to carry on and may have to seek relief through bankruptcy.
While Bed Bath & Beyond is still struggling financially, its shares rebounded sharply in high-volume trading on January 9 amid speculation on online forums, including Reddit, that the company might be a potential acquisition target.
The speculation went viral on the internet, which is reminiscent of the "meme stock" phenomenon of 2020, and it made the company's shares last up 35% at $1.77 on that day.
4. BlackBerry Ltd (NYSE:BB)
Founded in 1984, BlackBerry Limited is a Canadian software company specializing in cybersecurity, but it's another struggling company on this list of meme stocks since the short interest once hit a four-year high.
As the parent company of mobile phone manufacturing brand BlackBerry, the company was trading for around $9 before the meme stocks boom, where its share price more than tripled to a 52-week high of $28.77, according to CMC Markets.
With the five-year partnership with the University of Waterloo to drive research and development and innovation in Canada, its stock is worth noting in the coming years.
5. Nokia (NYSE:NOK)
The COVID-19 pandemic has slowed down Nokia's rollout of 5G technology globally. As a result, a large number of hedge funds and institutional traders shorted the company's stocks in 2021.
With its large market capitalization and global presence, some investors are still optimistic about Nokia's future and think that the company is more than just a meme stock.
Maybe that's why there was a surge in the company's stocks in January 2021, and a short squeeze occurred over a single day, making the company's shares jump by 106%.
Although Nokia was listed as one of the "must-watch" meme stocks in 2021, the bullish sentiment only lasted one day.
Risks of investing in Meme Stocks
High volatility
Meme stocks are extremely volatile due to its dependence on social media sentiment, even if investing in them may seem like a sure-fire way to grow your wealth massively, but the spikes in stock value are virtually impossible to predict.
Likewise, you also can't predict whether the price will plunge at one point to incur quick losses because these stocks are driven by supply and demand rather than focusing on fundamentals.
Investment fraud
While purchasing meme stocks to diversify your investment strategies is solid, as long as you have gauged the risk tolerance, you should be mindful of "the pump-and-dump" scam. Often, scammers falsely promote a stock they have invested heavily and convince others to do so.
However, when new investors buy in to shoot up the stock, and hit the peak, the scammer will dump their shares to drag down the stock’s value, leaving others with worthless shares. Also, we should stay vigilant to share any personal information on social media.
Frequently Asked Questions (FAQ)
What are the most popular meme stocks?
- The most popular meme stocks are GameStop Corp., AMC and Bed Bath & Beyond Inc..
Is it risky to invest in meme stocks?
- Yes! The performances are mostly based on social sentiment instead of the company’s fundamentals, hence the volatility is very high.