Meme Stocks were back in the news recently.
With the IPO of Reddit (RDDT), and the even more meme-ish merger of Trump Media and well-funded SPAC, Digital World Acquisition Corp (DJT), the market welcomes back talk of meme stocks. Both stocks jumped over 70% in their first few days of trading, before pulling starting to come back to earth following the initial release. There is some question as to whether the post-IPO jump for DJT and RDDT are due to viral popularity, or because they are the first two significant media companies to begin trading in quite some time. But for investors, understanding what it means when a company is mentioned as a meme stock.
What is a “meme stock”?
The term “meme stock” was coined during the GameStop (GME) saga of early 2021, where a surge of retail investors banded together on platforms like Reddit to drive the stock price up, and put the squeeze on hedge funds who had shorted the GameStop stock (and subsequently AMC).
In the market, the term “meme stock” now refers to a stock whose price is being driven by something other than market fundamentals—namely where internet culture, social media, and hype are influencing the price movement.
Why do people invest in meme stocks?
There are generally two types of investors on the meme stock ride—those who are driven by their support of the stock/company (not business metrics), and those who have pegged the stock as a meme stock and are looking to make a quick buck (get in, then quickly get out after the surge). As seen with GameStop, eventually market forces are expected to bring the stock’s price in line with a company’s business fundamentals.
How should investors think about meme stocks?
When evaluating a stock that’s been mentioned as a “meme stock,” be aware that there could be a high degree of volatility, with the stocks often experiencing a rapid rise, followed by an eventual crash back to earth. Make sure you have the risk tolerance to weather that volatility before you jump on the meme stock bandwagon. As always, do your homework and speak to a financial professional if you’re not sure if meme stocks are for you.
And if you’re interested in how the GameStop saga played out, grab some popcorn and check out Dumb Money (streaming on Netflix).
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