Meme stocks are the result of applying popular culture to financial markets. The list of companies turned into meme stocks on U.S. exchanges has been expanding in recent months, affecting a broad group of companies. But what exactly are meme stocks?
Meme stocks are publicly traded companies whose stock prices are driven by investor platforms created in online forums. In other words, these are stocks that rise in the market due to positive comments on platforms and investor forums that bring together thousands of small investors. Social media plays a significant role.
These comments attract potential small investors who, otherwise, might not buy stocks. Thanks to the collective action of all these investors, the stock value skyrockets. This was evident in the most striking case of meme stocks, the video game store chain GameStop, which saw its value increase by as much as 600%.
Meme stocks: investment disseminated through social media
The experts explain that meme stocks reflect the democratization of stock investment and the rise of social media as an information medium. The lockdowns generated by the pandemic have also incentivized both online trading and the exchange of information among investors.
But these meme stocks also share other common characteristics. For example, they are small-cap companies, yet well-known among investors. This translates into attracting many former users to their forums who are drawn to values that represent a part of their youth.
In other words, investors share memories on these company forums of better times gone by, fostering empathy with companies that are far from their heyday. Examples include the AMC movie theater chain or the video game store GameStop.
However, the list is broader and includes old technology companies that were once market leaders such as Nokia or Blackberry, or those from other sectors like Bed Bath & Beyond, Clover Health Investments Corp, Clean Energy Fuels Corp, Draftkings Inc, Microvision, Novavax, Palantir Technologies, Peloton Interactive Inc, Sundial Growers Inc, and Workhorse Group.
The key is a certain sentimental attachment to the stock
The reason why a group of forum users decided to become shareholders of GameStop was the entry of vulture investment funds into GameStop’s capital, aiming to sink the company with short positions.
The forum users did not want their ‘old friend’ to be played against, so they joined forces to defend it. Since it was a small company, a collective effort from many allowed the funds to incur significant losses and exit the stock by closing their short positions. This marked the birth of the first meme company.
After GameStop, there have been similar situations of savers defending certain companies to which they feel nostalgic, such as the case of AMC, but they haven’t been as widely publicized.
Meme Rally
However, terms like ‘meme rally’ or ‘meme squeeze’ have emerged, explaining a new investment strategy among retail investors. Apparently, there is a trend among these investors to support small, troubled companies that have a strong presence on social media among former users.
But not only emotional factors explain the meme phenomenon. Behind it, there is also a calculated investment strategy in companies with a high proportion of short positions. The strategy precisely aims to force the closure of those positions with strong upward pressure on the stock. As the price rises, investors with short positions tend to increase them, but there comes a point where they cannot bear the losses and are forced to close them. This process, known as a short squeeze, ends up further boosting the stock price.
No Fundamentals and Highly Volatile
From a market perspective, meme stocks lack fundamentals to support them and are highly volatile. However, the reality is that the early cases of meme stocks did have a foundation. That collective sentiment that the market ignored and that prompted small investors to enter the stock to defend something they considered theirs in a way: the store where they bought their first video games or the neighborhood movie theater chain.
