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2 Quick Points to Simplify Meme Stocks
To the moon?
GameStop, AMC, and BlackBerry. It is fair to say that those three stocks have are what started the trend of meme stocks. So what is a meme stock? A meme stock is the stock of companies that have surged in price due to virality on social media platforms such as Reddit, YouTube, and Twitter. The increased buzz around a particular stock prompts retail investors across these platforms to purchase shares or call options on those stocks because they believe the stock will rise.
A key aspect of meme stocks is that they have high short interest, mostly from institutional investors. What does that mean? That means that there are institutional investors believe that the stocks will decline in price. With increased purchasing of meme stocks by retail investors (and some institutional investors), they look to squeeze the institutional investors that are short on the meme stocks out of their position, eventually causing what is known as a short squeeze. A short squeeze is the rapid increase in the price of a stock primarily caused by excessive shorting. The two following points will help to simplify meme stocks further:
1. How Do Meme Stocks Go Viral?
2. How Do I Keep up with Meme Stocks?
1. How Do Meme Stocks Go Viral?
Meme stocks go viral via social media platforms such as Reddit, YouTube, and Twitter. To understand how they reach virality, we can break it down into four stages: early adoption, middle adoption, FOMO adoption, and profit-taking.
Early adoption is when niche groups of retail investors identify, buy into, and post about undervalued stocks with a growing short interest and some interesting factor, such as childhood nostalgia or underappreciated technology. The middle adoption is when posts related to those stocks start to increase, more people buy into them, and their share prices start to elevate rapidly. Middle adoption is when the stocks reach meme stock status due to going viral.
FOMO adoption is when all major news sources start to report on the meme stocks’ rapid gains, more investors who have not done their research start to buy into the meme stocks, and many retail investors start to share their unrealized gains. Finally, profit-taking is when investors in the early and middle adoption phases exit their positions and take profit. Those who entered in at FOMO adoption likely experience losses.
2. How Do I Keep up with Meme Stocks?
When it comes to keeping up with meme stocks, the first place to stop is the WallStreetBets subreddit. That is where all things related to meme stocks start and then spreads to other social media platforms. The posts on the subreddit are filled with memes and due diligence on what some users believe will be the next best meme stock. On YouTube and Twitter, you can easily search for keywords such as meme stocks, stonks, and wall street bets to find media that will further fulfill your interest in meme stocks.
So why did I create an article about meme stocks when I am a long-term investor that likes to focus on the strongest ETFs and companies? It is important to be educated on other aspects of investing. I have not put my money in any meme stocks because they do not fit my criteria, but it is exciting to see people be able to pay off things such as student loans, medical bills, and mortgages with the gains they have received from their short term investments in meme stocks. Will the meme stocks trend continue? I think so. I also think that more institutional investors will avoid being on the short side of meme stocks and go on the long side due to the massive amounts of money some of them have lost shorting. At the end of the day, the biggest winner of meme stocks will likely be the IRS since many will be paying short-term capital gains tax next tax season.
