With the meteoritic rise in retail trading in early 2020, the internet spawned a category of stocks. Many retail trading brokers changed their business models by eliminated commissions and trading fees. This was done to make trading more accessible for retail traders and to also compete with other brokers. This paradigm shift in trading combined with the power of the internet and social platforms gave birth to a new category of stocks known as meme stocks.
Summary
- Meme stocks are stocks that gain quick popularity from online communities and social platforms to push the stock price higher
- GameStop (GME) and AMC are the two most notable meme stocks in 2021
- The biggest meme stock community can be found on the subreddit r/wallstreetbets
- Meme stocks tend to be extremely volatile and should be traded with extreme caution
What is a Meme Stock?
The term “meme stock” refers to a stock that gains massive popularity from retail investors through social platforms and communities, most notably Reddit. The communities focus on building hype and interest in the stocks by engaging in conversations, sharing their stock positions, and ideas with others.
Meme stock communities can collectively influence the price of the stock through aggressive buying on margin. They also target stocks that have a high short-interest. The people in these communities hang out on Facebook, Twitter, and specifically the subreddit known as r/wallstreetbets/.
The rise and accessibility for people to invest and trade stocks has empowered these communities. The overall size of these communities are in the millions. Collectively they can have a significant influence on the price of stocks.
Meme Stocks and How They Work
Meme stocks can become extremely overvalued over their fundamental factors in a very short period of time. One of the main reasons this happens is because these communities target dying companies that have a high short interest.
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A high short interest indicates the total number of shares on a particular stock has a high ratio of shares being sold short relative to the total number of shares outstanding. This means that someone, mainly hedge-funds, are betting against the stock. This is a metric that speculators have begun paying close attention to.
High levels of retail buying can quickly trigger a short squeeze and cause the price of the stock to skyrocket. This is exactly what happened with GameStop(GME) and AMC, which are the two most notable meme stocks in the past year. Retail traders quickly took notice of the massive short interest on GameStop and decided to beat the hedge funds at their own game.
With COVID-19 forcing people to work from home, retail trading experienced a massive boom. It fueled and helped to push meme stock communities and trading activity to new heights. These communities even developed their own glossary of stock trading terminology throughout this period. Zero commission trading apps like Robinhood experienced massive growth throughout this period. They also experienced public scrutiny in how they handled the influx of retail trading volume.
Examples of Meme Stocks
GameStop: The Original MemeStock
The first meme stock rally starts off with GameStop Corp (GME). In September of 2020, founder and ex-CEO of Chewy, Ryan Cohen disclosed a near 10% teak in GameStop. This made him the biggest individual shareholder at the time. He would later increase his position to 12.9% and express willingness to get involved in the company and restructure it.
Ryan Cohen’s investment in GameStop stock would later be picked up by a r/wallstreetbets user known as The Roaring Kitty (whose real name is Keith Gill). Keith would go on to post a viral video about GameStop in which he would lay the foundation for the meme stock to take off.
Below is the original video and his reasoning as to why this is a great investment.
In the video he articulates why he believes GameStop’s high short interest can act as a catalyst to push the stock from $5 to $50 per share. Since short positions were held primarily by large hedge funds, they would need to cover their positions in the event of a short-squeeze. This short squeeze was followed by a gamma squeeze.
The stock would go on to end 2020 with a price of around $20. A massive 4x increase from the time Ryan Cohen announced his position and Keith Gill posted his video. Little did anyone know, the run in GameStop was far from over.
GameStop Saga Continues in 2021
In January of 2021, the short squeeze that Keith suggested in his video took place. The price of GME shot up to nearly $500 with hedge funds getting forced to cover their short positions. This massive short squeeze was labeled a sigma five event. It showcased the power of retail traders to band together and control the price of a stock.
Some hedge funds were completely wiped out from this short squeeze and forced to shut down. Below is the of GameStop (GME) during the massive short squeeze.
As result of this massive short squeeze event, the “meme stock” concept was born. Several other meme stocks would emerge throughout this period such as AMC, Bed Bath & Beyond, and a few others.
This event forced hedge funds to change their risk models to account for the probability of supernova stock events. The GameStop saga was instrumental in further building up meme stock communities and showing the public that the people still have power.
Meme Stock Glossary
Throughout the massive growth of retail trading between 2020 and 2021, the WallStreetBets community created their comical terminology. These terms depict some of their reckless actions and beliefs in meme stocks. If you happen to join the r/wallstreetbets/ subreddit you will more than likely come across these terms. Let’s take a look at some of them below:
- Apes: An Ape is a member of the meme stock community, usually on WallStreetBets. The term is a reference to retail traders who are inexperienced and make extremely risky trades regardless if they understand the trade or risks involved.
- Diamond Hands: This is a term that means to hold onto the stock even if you are currently experiencing heavy losses and serves as a mark of confidence in the future of the stock.
- BTFD: This is an acronym for “buy the fucking dip”. This means to buy the stock when it’s going down because there is an underlying belief that the stock will go up again soon.
- FOMO: FOMO is another popular acronym meaning the “fear of missing out”. Most retail traders or “apes” experienced the FOMO when others are pressuring them to buy into risky stocks.
- Hold the Line: This is a term that is used to give other retail traders encouragement when things don’t appear to be going well with the price of a stock. As in, “hold the line the stock will soon reverse”.
- Paper Hands: This is a derogatory term aimed at people who have sold the stock and are not maintaining diamond hands.
- Stonks: This is an intentional misspelling of the word “stocks”. This is mainly a meme of a bald cartoonish man in a suit and ties starting at an arrow going up in price who thinks he knows what he is talking about.
- Tendies: This term is short for “chicken tendies” and refers to profits that are made in a risky trade or meme stock. As in, I love collecting tendies.
- To The Moon: This is the idea that the price of the stock will rise extremely high. As in, “this one is going to the moon”.
- YOLO: This is an acronym for “you only live once”. To YOLO in WallStreetBets language means to risk your whole account on one extremely risk trade in an attempt to get rich.
Things to Keep In Mind
Meme stocks have been extremely beneficial for retail investors and traders of all sizes. On the other hand, they have also caused scrutiny from regulators and old long term investors. Most would agree this pressure of buying and selling between hedge funds and retail investors has stirred up quite a bit of public controversy.
If you decide to get involved with high risk stocks specifically “meme stocks”, it’s important to invest with capital which you aren’t afraid to lose. This is something most “traders” fail to do.
