Meme Stocks Explained

Meme Stocks Explained

The past week has seen GameStop stock skyrocket thanks to the WallStreetBets subreddit. This has made it one of the most successful meme stocks ever, but what does that actually mean?

What is a meme stock?

To put it simply, a meme stock is when the share price of a company is pushed significantly up by individual investors.

They’re often users of Reddit and Robinhood (a commission-free investment app that isn’t available in Australia) and the stocks of choice generally ones with single digit prices that are shorted.

This very basically means hat investors or hedge funds borrow stock, rather than buy it, betting that the price will drop even further.

They then buy these stocks back at the lower price and the borrower pockets the difference.

It’s a risky stock play but generally would seem safe enough with stock that is in a decade-long slump such as GameStop. On top of that, there were recent analyst predictions that the stock would drop further.

From there, there tends to be a collective push to drive the stock price up, as we have seen with GameStop this week.

This is not the first time that meme stock have been a thing — the term and practice has been around for awhile now — but it certainly seems to be the most significant case.

You know you’ve made meme history if even Elon Musk gets on board.

But this tactic isn’t exactly new. It’s just a modern version of a bull raid — a tactic used by traders in the 1920s to do exactly the same thing — get a group together to push up stock prices. The main difference is that they didn’t have the internet.

Why do they work?

They don’t always. But GameStop has definitely been a success, so far, for a few reasons.

Firstly, meme stocks start off so cheap that there’s a far smaller barrier to entry than more expensive stocks. This also means that if a stock takes off, it’s easier to imagine making a killing.

Popularity also plays a part. They’re called meme stocks for a reason – they can go viral, even if the push was started as a joke.

GameStop stock was sitting at $US4 per share in July of 2020. At the time of writing it’s at $US347.51 with the subreddit pushing to get it higher.

There are 3.9 million users on the WallStreetBets subreddit. This gives them substantial influence and power – a fact that is worrisome to a large chunk of traditional investors and stock market analysts.

And this did seem to drive some people to go even further with this particular meme stock. Not only were profits high, they were screwing over some traditional wealth holders who make money by betting on stock drops.

In this case, hedge fund Melvin Capital had to ask for a bail out after losing billions shorting on GameStop. And while it did get a cash injection from some other funds, ultimately it has to close its position at a 100 per cent loss.

The r/wallstreetbets subreddit has also been collectively driving other stock such as Nokia, Blackberry and AMC up this week. It even got the bankrupt Blockbuster Video stock to jump by 700 per cent.

But while these have been significant gains, they have been no where near the same scale as GameStop. At least not so far.

But despite the success of GameStop in particular, it’s worth remembering that the stock market is a volatile place. There is no guarantee of coming out on top. There is always risk, particularly if you’re new to the market, and especially for those of us who don’t have the option of a bail out.