In the late 1990s and early 2000s, these sites helped promote and drive up the prices of so-called dotcom stocks—a bubble that famously burst with far-reaching economic consequences. A meme is an idea or some element of popular culture that spreads and multiplies across people’s minds. Memes gained increasing prevalence and relevance as the internet and social media grew.
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While Reddit xabcd pattern indicator suite for ninjatrader 8 users are considered the primary catalyst for the GameStop price increase, there were also several other factors. This includes the COVID-19 pandemic, money available from stimulus checks, Elon Musk tweets, and heavy news coverage. Meme stocks are highly volatile, meaning that you can lose a lot or everything when the price plummets. Owning one can be anxiety-provoking, too, as you watch the stock price zoom up and then plummet. Rachel Curry is Pennsylvania-based content writer and journalist talking all things finance. Additionally, some people may focus on entertainment trading, which is akin to gambling.
What is a ‘short squeeze?’
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. After the initial meme stock craze, GameStop shares drifted steadily lower, settling at just over $10 a share by the Spring of 2024. However, in mid-May of that year, the stock experienced a sudden resurgence, fueled by the return of Keith Gill, aka “Roaring Kitty,” to social media. Gill, who had been largely absent from the public eye since the height of the meme stock frenzy in 2021, posted a cryptic image from his X account, which was viewed over 24 million times, followed by a series of movie-inspired video memes.
Investors may be looking ahead to potential rate cuts by the Federal Reserve, but those are far from a guarantee. Shares of GameStop soared more than 110 percent in early trading Monday after Keith Gill, who goes by Roaring Kitty on social media sites X and YouTube, posted for the first time in three years. Shares of other popular “meme stocks” such as movie theater chain AMC Entertainment were also higher, harkening back to the frenzied pandemic trading of 2020 and 2021. Such information is time sensitive and subject to change based on market conditions and other factors. You assume full responsibility for any trading decisions you make based upon the market data provided, and Public is not liable for any loss caused directly or indirectly by your use of such information.
This led to user outrage along with class action lawsuits as well as regulatory fines and restitution of approximately $70 million. This short squeeze scenario can lead large short sellers to lose money — sometimes millions or billions of dollars. Meanwhile, people on social media who rallied behind this stock early on may profit from the price increase.
Only a small number of these have been approved for trading so far, but do include some meme stocks like Tesla and NVIDIA. Stocks are sold short on margin (because they involve borrowed shares). As the price of the shorted stock rises, the short seller will begin to experience losses. These losses must be covered in a timely fashion, often prompted via margin calls, whereby the broker demands funds to make up for those paper losses. Market analysts and observers drew parallels between the 2024 rally and the original meme stock phenomenon of 2021. However, opinions were divided on whether this new surge would have the same lasting impact or if it was simply a brief revival of the speculative fervor that had characterized the earlier event.
Meme stocks are prone to risk and reward
Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance. Indeed, as these became recognized meme stocks, members of r/wallstreetbets and similar outlets began to acknowledge the humor (for the “lulz”) of seeing such legacy companies emerge from the ashes in the stock market. Meme stock activity was given a great boost from bored individuals stuck at home during COVID-19 lockdowns combined with zero-commission brokerage apps like Robinhood. The Robinhood app saw overwhelming trading volume in meme stocks at times, causing multiple trade delays, outages, and platform crashes.
The International Review of Economics & Finance wrote that meme stocks became popular through the social media platform Reddit.com, specifically, subreddit.com, also known as WallStreetBets. “Retail trading in meme stocks is facilitated by social media, which are used as coordination devices to synchronize buy signals,” the review wrote. Meme stocks are a relatively new phenomenon, beginning in late 2020 and early 2021.
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- This is because their values are often tied to attention on social media platforms rather than the actual success of a company.
What is the main appeal of meme stocks?
This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. Meme stocks, however, didn’t truly emerge until the year 2020 via the Reddit forum r/wallstreetbets. Unlike its predecessors and other investing message boards, WallStreetBets became known for its unconventional and often irreverent tone. In this and other forums that have popped up since, users work together to identify target stocks and then promote them, while also putting their own money to work. With the internet, chat rooms and discussion boards devoted to investing and promoting stocks also arose.
Any investment comes with a degree of risk, but meme stocks can be especially risky and volatile. However, individual and retail investors on social media may notice a stock they believe is undervalued, and they begin rallying behind it. The rally can gain more momentum if it becomes a meme, potentially increasing the price of a meme stock. Another similar short squeeze occurred during the summer of 2022 when meme stock communities drove up the price of the Bed, Bath, & Beyond (BBY) shares by 314%. The meme stock community can build considerable clout around a share through online conversation on sites like Facebook, Twitter and Reddit.
Supporting documentation for any claims, if applicable, will be furnished upon request. Tax considerations with options transactions What is pessimistic are unique and investors considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy. When large numbers of people buy into a stock (which you can tell from the stocks trading volume), there are also a large number of people who could exit their positions in the short term. Because meme stocks depend on social popularity rather than company performance, they have their own set of risks and rewards. Buying or selling a stock based on what you read on social media is risky.
Regardless, the sudden resurgence of meme stocks in May 2024 served as a reminder of the unpredictable nature of markets and the power of social media to drive investor behavior. The main victims of the squeeze ended up being a handful of hedge funds, some of which were forced to shut down due to heavy losses. As a result, the meme stock concept adopted a David vs. Goliath or Robin Hood connotation of taking from the rich Wall Street elite and rewarding the small retail investor. Unlike online pump-and-dump schemes aimed at defrauding unwitting investors, the promotion of meme stocks largely involves buying and holding with the above-mentioned strong hands even after the price spikes. FinanceBuzz is an informational website that provides tips, advice, and recommendations to help you make financial decisions. We strive to provide up-to-date information, but make no warranties regarding the accuracy of our information.
But meme stocks also remain very volatile and risky, and retail investors are likely to be the ones to experience the most losses when it all comes crashing down. Ultimately, a short seller may run out of available funds to hold on to the short and will be forced to buy back the shares at a higher price and close out the position. If many shorts are forced to cover at once, it adds additional upward pressure on the stock’s price as they are all forced to buy the stock and cover at ever higher prices. This is known as a short squeeze, and it accelerates a stock’s price increases as more and more short sellers are forced to bail out to cut their losses.
