Key Highlights
Meme stocks draw the attention of retail investors through social media forums, internet memes, and online excitement. This drives up their stock price and trading volumes.
A stock's price may climb by 30% to 50% in a year. However, the price of a meme stock may do so in only a few hours or days. Investors purchase these stocks out of a sense of FOMO.
These expensive companies are susceptible to a high level of market volatility since they don't have strong company fundamentals, performances, or future prospects.
Investors invest in the Meme stock market out of a sense of FOMO.
What are Meme Stocks?
A meme stock is one that gained popularity as a result of social media. This is often because of viral stock memes trending online. These stocks gain attention based on stock market memes shared on Facebook and Twitter or become a topic of discussion on websites like Reddit and StockTwits. These stocks are risky investments for new investors since they are often volatile and subject to sudden price changes.
As the buzz grows, the hype for meme stocks may accelerate. This shall boost the share prices of sometimes unpopular and barely traded firms. Examples include popular meme stock GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC). Investors sometimes suffer heavy losses. It was seen when the long-running meme stock Bed Bath & Beyond finally filed for bankruptcy.
These stocks are very volatile and very speculative. Sometimes, the price increase of a meme stock occurs in a matter of days rather than years. These equities' prices are also subject to sudden drops. This is because short-term hype increases the stock price more than its actual performance. However, it's unlikely that the stock will remain at this level for very long. As a result, such stocks are seen as being quite risky. More than 5–10% of an investor's portfolio exposure should not be placed in such stocks.
An investor can invest in the meme stock market in the same way he does in other companies. One just has to place a buy order with a stockbroker.
Examples of Meme Stocks
Let’s now take a look at some popular meme stocks.
ITC
One of the most popular meme stocks in India is ITC. Even though it has been a conglomerate for more than 100 years, the stock price didn't change significantly. The stockholders debated whether to continue holding it or sell it. It was trading at Rs. 211.80 on May 6, 2016, and at Rs. 212.60 on May 17, 2021, according to a five-year price comparison. The price of the stock has not changed in this way. As a result, the stock began to face criticism on social media through memes. In this manner, ITC stock became meme stock. The stock surged and reached its 52-week high in April 2022.
AMC Holdings Entertainment Inc.
AMC was on the verge of bankruptcy due to the COVID-19 pandemic in January 2021, which caused its shares to drop to an all-time low of $1.91. AMC stated on January 25, 2021, that it will refinance its European revolving credit facility in order to raise additional capital. Retail investors united in opposition to short sellers when this story went viral on Reddit's WallStreetBets. AMC stocks quickly increased and increased by almost 300% during this time. Corporate Finance as a source
Simran Farms
Retail investors were interested when a well-known, high-profile investor purchased a 1.1% share in the Indore-based Simran Farms. The company's shares increased by almost 44% when the story gained widespread attention.
How Meme Stocks Work?
Meme stocks often surge in popularity due to social media excitement rather than their performance or company fundamentals. Some traders start buying as soon as they spot an undervalued stock. The trading volume of the stock considerably rises whenever more traders buy it. The demand for that stock increases as it becomes well-known or begins to gather momentum on social media through memes.
The demand for a stock increases as it gets popular. This ultimately drives up its price. Some investors buy it when the price rises out of a sense of FOMO or fear of missing out. Such a stock becomes a meme stock in this way. Such meme stocks might have an overnight price increase of 25–30%.
4 Phases of a Meme Stock
The evaluation, investment, and usage phases in the cycle of meme stocks are as follows.
Early Adopter: When investors start purchasing equities because they believe they are undervalued. The trade volume drastically rises as a result.
Early Interest: It happens when investors start to acquire equities when they see a surge in the volume of stock trading. The price of meme stocks rises dramatically as a result.
FOMO: Investors who have FOMO (fear of missing out) worry about passing up the chance to purchase stocks while their prices are rising. They consequently buy stocks depending on the interest they garner online.
Flash Selling: This refers to investors selling their stocks at their peak prices to maximise their gains. It is the starting point of the pricing.
Meme stocks have significantly impacted the stock market. Their popularity has put pressure on the hegemony of institutional investors and conventional market dynamics. The popularity of meme stocks has brought a significant influx of retail investors into the market. This has given them access to the market and the capacity to affect stock prices. Meme stocks add uncertainty to the market as a whole. They increase price volatility. Thus, making predictions for conventional investors becomes more challenging.
Investments in meme stocks are rising. So, authorities are now closely examining how social media and online communities are used in stock trading. The trend has sparked debates about future legislation.
Advantages of Meme Stocks
Below are a few advantages of holding meme stocks in the portfolio.
- One can quickly generate large profits.
- Investors gain access to the market.
- Meme stocks aid in understanding the stock market dynamics.
Risks of Investing in Meme Stocks
Meme stocks have a high level of volatility, making them riskier investments. Discussions in internet forums and the level of enthusiasm surrounding the stocks influence the price. Investors must thus take a careful investment approach. The following are the dangers connected with meme stocks:
Since the price of the meme stock is not based on the performance and fundamentals of the firm, the best time to sell is unpredictable.
On social media, meme stocks are becoming more popular. The value of the first meme stock will definitely decrease if investors' focus shifts to the second. Investors who sell pricey stocks at cheaper prices in this situation risk losing a large sum of money.
This brief price increase immediately reverses, increasing the volatility of meme stocks and leading to their eventual collapse.
Sudden price swings resulting from unexpected shifts in supply and demand can lead to substantial losses.
Conclusion
Meme stocks are a new and unusual force in the financial markets. The influence of social media and small-scale investors drives them. However, due to their extreme volatility, they carry inherent risks. Investors who are interested in meme stocks should exercise caution and understand that these investments are speculative.
They should reach out to experts at trusted financial firms like Kotak Securities and seek suggestions. It is wise to follow the advice of experienced professionals while investing in high-risk investment avenues like Meme stocks.
