What are meme stocks? Everything you need to know about the stocks everyone is talking about.
On the financial markets, there is more talk every day about meme stock, a particular type of stock capable of attracting new investors thanks to their performance which has left traditional operators stunned.
The word "meme" in ancient Greece was used to indicate something that was imitated and rapidly spread. In Richard Dawkins’ book, The Selfish Gene, a meme is "a self-propagating unit" of cultural evolution that spreads by imitation.
But then, exactly, what are meme stocks? From GameStop to AMC, passing through the most recent case of Tupperware shares, "meme stocks" are shares of companies with economic prospects and uncertainties that suddenly begin to rise, initially driven by the coordinated action of groups of small private investors and then by larger slices of investors.
What are stock memes
The term "meme stock" refers to the shares of a company that have gained viral popularity mainly stemming from forums and social networks such as Reddit, Twitter, and Facebook. The phenomenon arises when one or more online communities begin to devote a lot of research and resources to a particular stock.
Although some believe that meme stocks are the result of a coordinated strategy by communities to influence the prices of these stocks, the buyers of meme stocks are often a disorganized collection of independent individuals, each with their own opinions and investment preferences. Collectively, these investors have been shown to generate short squeeze on heavily shorted stocks. As a result, meme stocks are usually overvalued relative to technical and fundamental analysis.
The meme stock phenomenon was born in 2020 and sharpened in 2021, when the US video game retailer GameStop (GME) saw its share price rise by 1,900% in less than a month. Starting on Reddit and other online communities, the phenomenon triggered steep losses for those professional investors, such as hedge funds, who were aggressively positioning themselves short in light of the company’s difficulties.
Thus a classic pump-and-dump scheme is triggered: once the "Pump" (pumping) of the security involved is complete, it is the turn of the "Dump", the equally rapid deflation of the shares.
How a meme stock is born
A meme stock arises from a general diffusion among some private investors, a small "popular culture" that spreads and multiplies in people’s minds. Stock memes were born and have seen their resonance grow thanks to the growth of the Internet and social media, where the rapid and multiplicative effect of sharing posts can make an idea quickly go viral.
With the Internet, chat rooms and discussion forums dedicated to investing and trading stocks were also born. In the late 1990s and early 2000s, these sites helped promote and drive up the prices of so-called dotcom stocks, fueling a speculative bubble that burst, with international economic consequences.
Stock memes, however, really emerged in 2021 via the Reddit forum, especially the r/wallstreetbets stream, which has become infamous for its unconventional and often flippant tone. In this and other forums that have popped up since then, users work together to identify stocks to push.
The GameStop case, history’s first meme stock
In August 2020, a video was released on the Roaring Kitty (real name Keith Gill) YouTube channel, which later went viral, explaining why shares of video game retailer GameStop Corp. (GME) could rise from $5 to $50, highlighting how the stock was subject to a large number of short bets (aiming for the price to fall), especially at the hands of some hedge funds, and how they would need to hedge their positions in the event of a short squeeze, an event which would have pushed up the price of GameStop stock.
A few days later, former Chewy.com CEO and investor Ryan Cohen, who is also very active on social media, bought a massive (but then unknown) amount of GME stock in the company. In November 2020, Cohen owned a 10% stake in the company.
On January 12, 2021, he joined the board and shares soared. In two sessions the value had doubled and turned out to be 8 times higher than the price recorded before the posts of Cohen and Gill. In that same month, the short squeeze announced on The Roaring Kitty channel takes place, with the price of GME shares flying just below $500 thanks to the frenzy generated by the hedging of short exposures and panic buying.
The main victims of the squeeze were hedge funds, some of which were forced to close due to heavy losses. This is how the concept of meme stock begins to take on a David versus Goliath connotation, or Robin Hood harming the wealthy Wall Street elite to reward small private investors.
The most popular stock memes
GameStop stock was the first stock meme to succeed, but it wasn’t the only one. WallStreetBets users identified other heavily shorted stocks, including AMC Entertainment Holdings Inc. (AMC), a US movie theater chain that has seen profits fall rapidly during the pandemic, and Blackberry Limited (BB), maker of smartphones now considered antiquated. Both stocks recorded dizzying gains.
Some meme stocks didn’t perform as well as others, albeit with occasional short squeezes.
Other popular stock memes include Bed Bath & Beyond Inc. (BBBY), Koss Corp. (KOSS), Vinco Ventures (BBIG), Support.com, and Robinhood Markets Inc. (HOOD).
Original article published on Money.it Italy 2023-08-03 18:10:06. Original title: Cosa sono le meme stock, le azioni che fanno impazzire gli investitori?
