Explainer: What are meme stocks?

On social media, a meme is typically a funny image or video clip that spreads widely and rapidly as people share it.

The world of stocks and shares has memes too.

They’re called meme stocks and they’re hugely influenced by online sentiment.

Meme stocks are company shares on the stock market that have gone viral because of their popularity on the internet, explains investing platform Public.com.

Social sentiment is a big factor in driving this popularity – as opposed to focusing on economic or corporate performance.

When people buy shares after reading about them on social media, it can lead to an “artificial” price rise, followed by an “inevitable crash,” says personal finance website The Balance.

Conversations and posts on websites and social media sites like Reddit, Twitter and Facebook can influence the price of meme stocks, Investopedia explains.

It describes the buzz that builds around meme stocks as “hype” and explains that meme stocks can have a “cult-like following”.

These online communities can help to drive the share price of meme stocks very high, and also very low, Public.com explains.

Meme stocks emerged in 2020 from a forum on Reddit called WallStreetBets. Users of this site and others work together to “identify target stocks and then promote them, while also putting their own money to work,” says Investopedia.

Unlike short term ‘pump-and-dump’ share investing schemes, meme stock investors aim to boost a company’s share price above its current level and keep the value higher by continuing to hold the stock, Investopedia adds.

American video game and electronics retailer GameStop is regarded as the first meme stock.

Its stock price rose more than 10,000% from $3.25 in April 2020 to $347.50 in late January 2021, according to The Guardian newspaper.

Investopedia describes this price hike as a “spectacular short squeeze”. This happens when a large number of investors bet on a share price falling.

Other meme stocks include cinema chain AMC, home retailer Bed, Bath & Beyond and commercial spacecraft developer Virgin Galactic, all based in the United States, according to investing website Business 2 Community.

Investors have won and lost millions in the meme stock craze.

Meme stock losers include consumers who buy into meme stocks at their peak, only to see them fall, The Balance notes.

Other losers have included hedge firms – investment firms who use strategies including betting on share prices falling. These firms lost about $19 billion when GameStop shares rose, Insider magazine reported.

Meme stock winners include GameStop investor Ryan Cohen, who paid $76 million for a 13% stake in GameStop in 2020. This rocketed in value to more than $1.3 billion when GameStop’s shares spiked in January 2021, according to CNBC.

Stock markets are much gloomier than they were in January 2021 and most meme stocks have dropped sharply from their highs, Reuters reported in January of this year.

That said, some meme stock shares are still worth more than they were before the meme stock craze started. At roughly $30, GameStop shares, for example, are about 76% above their $17-a-share level before meme stock investors got involved at the beginning of 2021.