Meme Stock Definition – Investopedia
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
A meme stock refers to the shares of a company that have gained a cult-like following online and through social media platforms. These online communities can go on to build hype around a stock through narratives and conversations elaborated in discussion threads on websites like Reddit and posts to followers on platforms like Twitter and Facebook.
Meme stock communities can thus greatly influence the prices of those shares through coordinated efforts to, for example, initiate short squeezes in heavily shorted names. As a result, meme stocks can become apparently overvalued relative to their fundamentals yet remain elevated for prolonged periods of time as members of the meme stock community keep their prices propped up.
Meme stock communities have also developed a glossary of informal slang and market terminology such as “diamond hands” (strong hands that will not sell even on dips), “tendies” (profits, jokingly referring to how many chicken tenders one can buy with them), and “to the moon” (anticipation of extremely above-average returns).
A meme is an idea or some element of popular culture that spreads and multiplies across people’s minds. Memes gained increasing prevalence and relevance as the internet and social media grew, allowing people to rapidly spread humorous, interesting, or sarcastic videos, images, or posts to others around the world. The rapid and multiplicative effect of sharing such posts could make them go viral.
With the internet, chat rooms and discussion boards devoted to investing and promoting stocks also arose. In the late 1990s and early 2000s, these sites helped promote and drive up the prices of so-called dotcom stocks—a bubble that famously burst in spectacular fashion.
Meme stocks, however, didn’t truly emerge until the year 2020 via the Reddit forum r/wallstreetbets. Unlike its predecessors and other investing message boards, WallStreetBets became known for its unconventional and often irreverent tone. In this and other forums that have popped up since, users work together to identify target stocks and then promote them, while also putting their own money to work. Unlike online pump-and-dump schemes aimed at defrauding unwitting investors, the promotion of meme stocks largely involves buying and holding with the above-mentioned strong hands even after the price spikes.
In August 2020, the YouTube persona Roaring Kitty posted a future viral video laying out the case why shares of brick-and-mortar video game retailer GameStop Corp. (GME) could soar from $5 to $50 per share. (Roaring Kitty’s real name is Keith Gill was also on Reddit as u/deepF…Value and active on the subreddit r/wallstreetbets.) In the video, he explained that the stock had among the highest short interest in the market, largely with short positions held by hedge funds—and that these funds would need to cover their positions in the event of a massive short squeeze, driving the stock much higher.
A few days later, the former CEO of Chewy.com and investor Ryan Cohen purchased an unknown amount of GME stock, which Gill acknowledged on Twitter. In November 2020, it became public knowledge Cohen owned a 10% share in the company. On Jan. 12, he joined the board and the stock rose was at $20. By closing two days later, the value doubled; an 8x increase from the price at the time of Cohen’s and Gill’s previous posts.
Then, in January 2021, the short squeeze that The Roaring Kitty had suggested took place in earnest, with the price of GME shares exploding to nearly $500 amid a frenzy of short-covering and panic buying. The main victims of the squeeze ended up being a handful of hedge funds, some of which were forced to shut down due to heavy losses. As a result, the meme stock concept adopted a David vs. Goliath or Robin Hood connotation of taking from the rich Wall Street elite and rewarding the small retail investor.
Meme stock activity was given a great boost from bored individuals stuck at home during COVID-19 lockdowns combined with zero-commission brokerage apps like Robinhood. In fact, Robinhood saw overwhelming trading volume in meme stocks at times, causing multiple trade delays, outages, and platform crashes. This led to user outrage along with class action lawsuits as well as regulatory fines and restitution of approximately $70 million.
While GameStop was the first successful meme stock, it was not the only one. WallStreetBets users quickly identified other downtrodden stocks with heavy short interest to boost. These included AMC Entertainment Holdings Inc. (AMC), the movie theater chain that saw flagging profits amid the COVID-19 pandemic, and Blackberry Limited (BB), the outmoded smartphone maker. Both stocks also saw their shares rapidly increase by multiples. Indeed, as these became recognized meme stocks, members of r/wallstreetbets and similar outlets began to acknowledge the humor (for the “lulz”) of seeing such legacy companies emerge from the ashes in the stock market.
Some meme stocks did not fare as well as others, even with the occasional short squeeze. Other meme names have included, among others, Bed Bath & Beyond Inc. (BBBY), Koss Corp. (KOSS), Vinco Ventures (BBIG), Support.com, and even the meme stock enabler Robinhood Markets Inc. (HOOD).
Meme stock communities have developed a specific lingo used in their posts online. Some of these terms include (along with emojis used to denote them online):
While meme stocks have been a boon to individual investors, day traders, and brokerage platforms, companies have also capitalized (quite literally) on the meme stock phenomenon. As a result of sky-high prices and persistent demand for shares among individual investors, AMC Theaters CEO Adam Aron took advantage of the elevated valuation and engaged in a series of secondary (follow-on) offerings in 2021, raising more than $1.5 billion in the first quarter (Q1) of that year from voracious meme stock buyers.
GameStop followed suit in 2021, raising nearly $1.7 billion via a secondary offering of 8.5 million additional shares at an average price of more than $200 per share.
Roaring Kitty. "The Big Short SQUEEZE From $5 to $50? Could GameStop Stock (GME) Explode Higher?? Value investing!,"
Aug 21, 2020. (YouTube Video)
Twitter. "Roaring Kitty, Aug. 28, 2020, 11:24 PM."
U.S. Securities and Exchange Commission. "Subject: Maximizing Stockholder Value by Becoming the Ultimate Destination for Gamers."
Yahoo! Finance. "GameStop Corp. (GME): Historical Data," Select Time Period, "Aug. 23, 2020 – Jan. 14, 2021."
GameSpot. "Pet Food Billionaire Joins GameStop's Board Of Directors."
Yahoo! Finance. "GameStop Corp. (GME): Historical Data," Select Time Period, "Jan. 17, 2021 – Feb. 04, 2021."
Financial Industry Regulatory Authority. "FINRA Orders Record Financial Penalties Against Robinhood Financial LLC."
CBSNews. "AMC, Nokia and Other 'Meme Stocks' Targeted By Reddit's WallStreetBets."
MarketWatch. “The Meme-Stock Moment Turns 1 — Unofficially — and Welcomes a Sophomore Class of Tickers.”
The New York Times. “AMC Cashes in on Meme Stock Mania, Raising $587 Million.”
Yahoo! Finance. "GameStop Corp. (GME): Historical Data," Select Time Period, "Jun. 17, 2021 – Jun. 24, 2021."
GameStop. "GameStop Completes At-The-Market Equity Offering Program."
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