What is this Meme Stock Mania?

By Ashley Rosson

In the past year you might have heard of the term Meme Stocks. A Meme Stock is a stock that sees significant increase in value after going viral on social media, grabbing the attention of individual or retail investors. This term made headlines in January 2021 after stocks of GameStop, a video game and pop culture store, skyrocketed thank to members of the Reddit forum r/wallstreetbets, that has over 10 million followers. Gamestop had been struggling and their shares were as low as $18.84 in December 2020, yet the Reddit forum caused the shares to go up 1,700% by the end of January. This also happened to other companies such as AMC Entertainment which was faced with bankruptcy until the r/wallstreetbets forum rallied to save it, and #SaveAMC trended on Twitter. Other Meme stocks include smartphone companies BlackBerry and Nokia.

How do Meme stocks work? Meme stocks’ prices are not based on a company’s business performance, but rather social media hype. This causes the meme stocks to be unpredictable, Investors on social media can artificially increase stock prices, which is usually followed by a crash. A meme stock’s price surge often starts when a bunch of investors, who think the stock is undervalued start buying in large quantities, causing the stock’s price to slowly climb up. Then the stock becomes popular due to the viral nature of social media. This new popularity means more people start buying stock. Once the buying peaks, the earlier stock holders start making money by selling their stock. But with any stock there are risks. David Mazza, Managing Director at asset management company Direxion told Forbes magazine in a recent article, “There’s going to be people who’ve had significant losses, who bought it at the top-who had no idea what they were doing and only looked at it with zeal and probably some jealously wanting to get involved. “We live in an environment of populism where information spreads through smartphones and social media, where good situations can become bad very quickly.”

This Meme Stock Mania, has caused an increase in trading activity among non-professional investors buying and selling stocks through brokerage firms or savings accounts. In March, over 80% of 450 million shares of AMC Entertainment were owned by over three million individual shareholders. The SEC, U.S Securities and Exchange Commission put out an alert to warn non-professional investors about significant risks of short term investing based on social media. The SEC stated, “it can be tempting to jump on the bandwagon and follow whatever the crowd seems to be doing, sometimes however, following the crowd may lead to significant investment losses.” Very few investors became “overnight millionaires” due to meme stocks such as Gamestop, the success stories are rare. According to Reethu Ravi, of Jumpstart, “while it can be appealing to hop on the latest investment trends and make money, it is vital to do your homework and research before you make any investment decisions. Without adequate research, investors won’t be able to asses if a stock is expensive or cheap, and will have to take a gamble. Research can help investors make informed decisions.

So hopefully that explains social media and the meme stock mania, I had to have someone explain it to me like I was 5, maybe they should create a video game to explain it, and raise the GameStop shares once again.