What Are Meme Stocks: Should You Buy Them?

Watch the full video here: Meme Stocks in 2021

Meme stocks — stocks that are propelled by social media frenzy — took the market by storm in 2021, shaking traditional investing norms.

Back then, I didn’t see meme stocks coming at all. Fast forward to now, and meme stocks like GameStop (GME) and AMC Entertainment have shaken the stock market in ways I never imagined.

In this article, I’ll explain what meme stocks are, how they work, and whether they deserve a place in your portfolio.

What Are Meme Stocks?

At their core, meme stocks are increases in the trading volume of specific stocks that go viral on social media platforms. Unlike a normal stock, the stock price here often defies traditional valuations and is not always correlated to the fundamentals of an asset’s worth, such as the revenues or profitability of the company.

As a result, meme stocks ride a wave of hype. They see their ticker symbol trending and attract all kinds of speculation, typically originating on social media like Reddit, TikTok, and Twitter.

A great example is GameStop’s stock. They were not doing well as a business venture, but retail investors on the WallStreet Bets subreddit — and streamer Keith Gill, aka Roaring Kitty — saw it as a chance to fight hedge funds that had short positions against it.

The result? A highly charged short squeeze triggered a massive spike in the price of GME to lighten the short position.

How Meme Stocks Work

The phenomenon of meme stocks wouldn’t exist without the internet and social media platforms. Communities like WallStreet Bets and platforms like Twitter drive these stocks’ rapid ascents. There are so many people trading these stocks who aren’t even looking at charts or Level Two — blowing through red lights and stopping at green lights.

Here’s how it usually happens:

• A struggling company, like a video game retailer or another kind of underperforming business, becomes the focus of attention.

• Retail investors share analyses, memes, and semi-ironic, semi-serious calls to action, rallying a large group to buy the stock.

• As more people get involved, the stock price skyrockets. If the stock is heavily shorted, this leads to a short squeeze situation, in which short sellers are compelled to purchase the stock, increasing its share price even more.

Free trading applications such as Robinhood have also contributed to this trend, thanks to the availability of commission-free trading. These apps have enabled meme stock investors to get more involved. However, a meme stock usually only lasts for a short period of time.

What Are the Risks and Challenges of Meme Stock Investing?

In 2021, we saw firsthand how exciting meme stocks can be, but they’re not without risks.

If you’re trading meme stocks as a beginner trader, you should definitely assume that you’ll lose money. I would urge extreme caution.

Here are just a few challenges that you can expect:

Unpredictable Volatility

Meme stocks are infamous for their extreme volatility, making them risky if you’re not prepared. Traders’ emotional decision-making often drives unpredictable patterns.

Disconnect From Trading Fundamentals

Unlike traditional investments, meme stocks often defy logic, with prices that are driven by hype, not data. As a result, traditional analysis methods may not help you.

Regulatory Scrutiny

Organizations like the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) closely monitor these trends and can — and have — taken action.

Emotional Decision-Making

Many retail investors buy into the fear of missing out (FOMO) or act impulsively, often leading to losses.

Investing in meme stocks requires a clear head and a strong stomach. Weigh the risks before driving in, and think twice if it’s your first time trading.

What Are Some Real-Life Examples of Meme Stocks?

To truly understand meme stocks, let’s take a look at a few examples:

GameStop (GME)

As we’ve discussed, the GameStop saga began as a rebellion against Wall Street. Retail investors on the WallStreet Bets subreddit targeted hedge funds that had heavily shorted the stock. That led to a short squeeze that sent GameStop’s stock price to hit an all-time high, soaring from $419 to $483 in January 2021.

But the volatility didn’t stop there. This thing squeezed from $380 to $500, then dropped to $260 — a 50% drop — before popping back to $480. It was crazy.

By the end of January, GameStop saw one of the most violent reversals in stock market history, plunging from $483 to $112 in a single day before recovering again to $370. These wild swings underscore the extreme risk of meme stock investing.

GameStop (GME) chart showing the wild price swings during the 2021 meme stock frenzy, driven by social media hype and retail investor momentum.

AMC Entertainment

Similarly, AMC Entertainment became a favorite among retail traders during the pandemic lockdowns. What started as a grassroots effort to “save movie theaters” became a stock market sensation. AMC’s stock climbed from $2 to $72 within months, giving the company an unexpected lifeline.

AMC wasn’t as initially strong as GameStop, but it found its wave of momentum later — especially in May when lockdown restrictions started to lift.

Other Meme Stocks

Companies like Bed Bath & Beyond, BlackBerry, and even cryptocurrency projects have experienced similar trends, proving the meme stock phenomenon isn’t limited to just one industry.

Should You Invest in Meme Stocks?

Here’s the big question: Are meme stocks worth your time and money? The answer depends on your goals and risk tolerance.

Pros of Meme Stocks

• Exciting potential for short-term gains

• Increased participation by retail investors, bringing fresh energy to the stock market

Cons of Meme Stocks

• High risk due to volatility.

• Prices often lack connection to real-world fundamentals

• A tendency to attract short sellers, which can lead to painful losses

Before investing, review your investment strategy and ask yourself if you’re really ready for the ups and downs of meme stock investing.

What Is the Future of Meme Stocks?

Looking ahead, the meme stock trend shows no signs of slowing. Here’s what you can expect:

• Emergence of ETFs: ETF providers are creating funds that focus on meme stocks, offering a diversified way to participate in the craze.

• Regulatory Changes: Increased scrutiny from the SEC and FINRA may shape how these stocks are traded.

• Evolving Investment Strategies: As the trend matures, we may see more sophisticated approaches to meme stock investing.

Are Meme Stocks Right for You?

The meme stock craze has shown that the stock market doesn’t always act rationally — it reflects human behavior and social dynamics. As a result, it’s up to individual investors to decide for themselves if the potential rewards outweigh the real risks.

If you found this investment advice helpful and want to learn even more, don’t forget to subscribe to my YouTube channel for all things day trading. Together, we’ll gain more knowledge and make better trades.