What Is a Meme Stock?

Are you a stock market enthusiast or trader? Or have you recently begun doing your homework on the stock market thinking of making your first wise investment?

Whichever side of the trading turf you belong to, you must be brushing up on the happenings of Wall Street. If you have, you will have come across a buzzword that has become the focal point of much “hype”—meme stock.

Meme stocks have taken Wall Street and the social media world by storm. Despite the disruptions day traders in meme stock have caused, meme stocks remain a mystery. And it may be to you as well.

Are you curious? Then keep reading to learn more about what a meme stock is and why you might need to pay attention to them.

Meme Stock in a Nutshell

A meme stock can be defined as a stock with a rapidly fluctuating stock price. Like many other stocks traded on Wall Street and elsewhere, these are shares of companies, often smaller ones. However, despite the small size of the companies that offer these stocks to day traders, the stock price is often quite high.

Other than stock price volatilities, a meme stock is unique in how it attains value in the eyes of investors. Regular stocks like blue chips have a value that is determined by how a company performs and keeps its business afloat. In other words, if a company brings in profit, its stock price may go up on Wall Street. 

This is not the case for a meme stock. A meme stock rises based on the notoriety it creates in online forums and on social media—hence the term “meme”. The value of a meme stock goes up not as a result of how a company performs on the market but because of popularity on the internet.

Notoriety and Gains

A major determining factor for the value of a meme stock is how much discussion it creates online. Reddit is home to Wall Street Bets, a subreddit consisting of entry-level investors with limited capital. The wallstreetbets subreddit opened the floodgates when users coordinated to purchase stocks from one company. In particular, it was a video game retailer that had most of its stocks in short positions—GameStop.

Early in 2021, users of the wallstreetbets subreddit purchased GameStop stock, creating an unprecedented trading volume for the lowly-valued video game retailing company. Needless to say, there was much interest being generated by this unprecedented surge in investing.

The resulting publicity generated curiosity amongst onlookers. As a result, more would give in to curiosity and FOMO (fear of missing out) and purchase stock.

GameStop was not the only company to experience a surge in investor interest not determined by company performance. AMC Entertainment Holding INC also experienced a similar surge owing to backing from anti-Wall Street investors. Like in the case of GameStop, investors banded together on social media to purchase AMC shares amounting to $10 million

In short, GameStop and AMC Entertainment were companies that were not turning in profits worthy of Wall Street investor attention. Rather, the interest and investment in these two companies were the results of social media attention.

A meme stock can be understood as a stock that attains its value based on social media attention. Unlike commonly traded stocks, the value of a meme stock is not contingent upon company performance and revenue.

Rather, online forum or social media notoriety are the major driving factors for a meme stock’s value. The surge in the popularity of meme stocks represents one thing: what can occur when social media mixes with a collective desire to “one-up” the capitalists of Wall Street.

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Opinion writer on 7trade7