What is a Meme Stock?

By Duncan Ferris

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A 7-foot tall statue of Harambe, the internet’s favourite gorilla, is the newest addition on Wall Street.

The statue of the famous ape, which depicts him reclining on one arm, was placed facing the famous Charging Bull statue, which was also surrounded by around 10,000 bananas.

The statue was put in place by Robert Giometti, Tejay Aluru and Ankit Bhatia, the co-founders of in-development social networking platform Sapien.Network. The trio said the display represented the millions of Americans who struggle under a capitalist system.

Harambe, resident gorilla at Cincinnati Zoo, became a popular online meme after the gorilla was tragically killed by a zoo employee after a child fell into the ape’s enclosure. While he seems like an odd envoy to send a message about struggling Americans, the giant golden ape’s appearance does demonstrate the increasing influence of the internet on Wall Street.

Perhaps the most prolific phenomenon among this rising influence is that of meme stocks. The latest of these is fruit-grower Dole (NYSE: DOLE), which saw its share price jump at the end of September. This came amid speculation that a spread of fungus on South American banana crops could work out favourably for the company.

Other recent examples include Blackberry (NYSE: BB) and AMC Entertainment (NYSE: AMC). But what is a meme stock and where does the saying come from?

Why did the term become popular?

The term ‘meme stock’ has really come into its own in 2021. You have probably heard it being used, even if you do not fully understand what it means.

The phrase appears to originate in the community of retail investors on Reddit. The subreddit /r/WallStreetBets, which has 10.9 million users, has featured usage of the term for at least five years. The forum’s posts largely consist of stock tips and memes about trading. The often poke fun at the subreddit’s aggressive investment culture and costly investing mistakes.

This online community, along with the meme stock as an idea, started to gain international attention in January 2021. This was when the infamous GameStop (NYSE: GME) short squeeze was making headlines. The fervour behind the rocketing value of GameStop shares had built from subreddits like /r/WallStreetBets.

Indeed, a cyber-security company later claimed that bots had flooded social media with posts urging people to buy GameStop shares.

Because of the online excitement, the share’s value and trading volumes far exceeded anything justified by the company’s position. Wall Street and the media needed a way to describe this phenomenon. Fortunately the phrase ‘meme stock’ was ready made for them by Reddit users.

Should I invest in meme stocks?

Investing in meme stocks can offer spectacular rewards, but is inherently risky and unstable . The problem is that the value of these investments are often driven entirely by viral excitement, rather than any perceived future success of the company involved. This means the stock is unlikely to hold this value for very long, so in order to make money you will need to buy early and make sure you offload your shares before they plummet in value.

We can take the GameStop story as an example. In just over two weeks in January 2021, the company’s share price increased from $19.95 to $347.51 on 26 January. Anyone who purchased the stock at the start of the story and sold their shares at the height of the excitement clearly made a killing.

However, it is worth bearing in mind that the shares quickly fell back to $53.50 on 4 February. Latecomers were at risk losing around 85% of their money in less than two weeks.

This all or nothing outcome should serve as a cautionary tale. Meme stocks can still serve as something to put a little money towards, but this should never be more than you are prepared to lose.

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Author: Duncan Ferris

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.