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Between the years 2021 and 2022, several online retail traders joined hands to shoot up certain stock prices. These stocks became popular on social media with loads of attention and came to be known as meme stocks. However, since there are no fundamentals involved, the stocks are subject to high volatility.
In this article, we will look at what is a meme stock, how it work, advantages and disadvantages of meme stocks.
What is a meme stock?
Meme stocks refer to securities that have a cult-like following due to hype created by investors on social media platforms. Online traders usually have discussions based on selected stocks on online platforms that create hype around certain stocks. As a result, these stocks experience a price hike due to their increased demand.
How does meme stock work?
The growing popularity of the stocks online is the reason behind the price hike of these stocks. The hike in the stock prices does not depend on the company’s performance or profitability but solely on its online support. The increase in the stock price is directly proportional to the audience’s reaction and interaction with the stock hike. The prices can rise about 30-50% overnight.
However, as soon as the popularity of the meme stock falls, they experience a sudden fall in prices. This means that these stocks are volatile and can even crash in extreme cases. The sale of these stocks is mostly dependent on the buzz created around these stocks irrespective of their market performance or the overall market condition.
Phases of meme stock
The meme stocks can be divided into four phases that determine how the retail investors evaluate the meme stocks. These phases are as follows:
- Early adopter phase
This phase includes traders who feel that a certain stock is undervalued and begin buying it. This leads to an increase in the trade volume and an eventual increase in the price of the stock.
- Early interest phase
Under this phase, the traders notice an increase in the trade volume of a particular stock and begin investing in it. This leads to an increase in the trade volume and the stock price.
- FOMO phase
The fear of missing out happens when investors feel that they might be missing out on a potentially high-profit investment when the stock prices are surging. The sense of FOMO is created through online platforms such as social media which leads to investors buying equities due to the rising online attention.
- Profit booking phase
This is the last stage wherein the investors sell the meme stocks when the rates are maximized to gain maximum profits. In this phase, the stock price starts falling as many investors pull out of their investments due to the fear of breaking losses.
Advantages of meme stock
Meme stocks are dependent completely on the temporary hype created but can benefit investors in various ways. These include:
- High returns
The primary benefit of meme stocks is the high returns. The sudden massive hike in stock prices can help investors earn good profits within a short turnaround time.
- New investment opportunity
Investing in a meme stock provides investors with a new opportunity to invest in a new stock in the market and stay ahead of the market.
- Knowledge of market dynamics
With complete awareness of the hype created around certain stocks on online channels, investors stay aware of the changing market dynamics and how it functions. This knowledge helps them in their overall investment strategy as well.
Disadvantages of meme stock
With all these advantages, there are also certain disadvantages of investing in meme stocks that must be kept in mind to make an informed decision. These disadvantages include:
- Volatile
The hike in the prices of meme stocks is created by an artificial surge in the stock demand. As a result, the security is highly volatile and risky to invest in.
- Unpredictability
The cause behind the price hike of meme stocks is not the company’s performance fundamentals but an unplanned surge in demand created through online social challenges. As a result, these securities are risky and unpredictable to trade in.
- Short-lived price rise
The price hike of meme stocks is very short-lived and falls as soon as the investors pull out their money from the fear of losing their money. As a result, the stock prices rise for a short period and can’t be depended on by the inventors.
Examples of meme stock
With an understanding of meme stocks, their functioning, and their phases, let us look at certain examples of meme stocks. These include:
- GameStop (GME)
This American video game and electronics retailer is renowned as the first meme stock. Its stock price rose drastically by over 10,000% in a short time frame.
- Bed Bath & Beyond
This stock gained a position as one of the hottest selling stocks on Wall Street all because of being a part of meme stock.
- Blackberry (BB)
The Blackberry stock was made into a meme stock through Reddit and the stock price rose significantly.
Conclusion
The meme stock can help investors and traders earn massive profits. However, they are volatile stocks and must be traded carefully as they are highly time-sensitive and their hike is only temporary. These stocks can teach the investors immensely about how the stock market functions.
It is crucial to take into account all their advantages and disadvantages to ensure that you make an informed decision and invest in profitable trades. Stay tuned to StockGro to learn more.
FAQs
Meme stocks are stocks around which hype is created by online retailers through social channels such as Reddit. As a result, the price of these stocks rises due to the surge in their demand.
The short sellers frequently target meme stocks to make massive profits and as soon as a short squeeze occurs, the price is hiked.
A meme stock is a basket of different stocks that function with the same underlying index. It is recommended that investors invest in these stocks to diversify their investments and minimize their risks.
In January 2021, a squeeze of the Gamestop stock along with other securities happened that led to huge losses for short sellers.
Investing in meme stocks can be profitable if they are sold timely. However, the security price hikes are not based on the company’s growth or fundamentals which makes them a risky trade.