Know more about Meme stock and why investors prefer investing in them
1. What is a Meme (pronounced MEEM) stock?
A Meme stock or a share is a stock that has seen a huge price rise over a short period of time, driven by social media interest in the stock. Social media platforms such as Reddit, Twitter, and Tik Tok are the primary platforms from which, the hype for these stocks emerges. The companies which experience a price rise rarely have the fundamentals to back the meteoric share price increase. Some of the popular Meme stocks include Gamestop, AMC Entertainment, Clover Health, and Wendy’s; all of which are listed in the US market.
2. What drives the price of a Meme stock?
The ‘fear of missing out’ (FOMO) is the main driver of the major increase in the price of Meme stocks. The term FOMO was created by Patrick J. McGinnis in 2004 and used by the heavily internet-connected Millennials or Gen Y. The fear is led by the fact that many investors are bombarded with social media updates/activities to the point where individuals/investors feel like they are ‘missing out’ if they do not actively participate in the social media conversations or activities around them.
3. What are some of the recent Meme stocks?
The term ‘Meme stock’ gathered pace in January of this year, when Gamestop, a US-listed gaming company saw a huge price increase of over 19 times from a level of US $18 in early January to US $347 later that month. The stock experienced a crash from these levels and was seen trading at US $44 in late February. Another recent example is AMC Entertainment, which was trading at US $ 12 in late May and is now trading at US $55. Clover Health is another Meme stock that appears to be in the early stages of a major price increase while it was trading at around US $7 in the middle of May; it skyrocketed to US $22 in early June before settling at around US $13 as of the last close.
4. Should an investor consider investing in a Meme stock?
Serious investors should not buy a Meme stock but day traders can consider trading the stock based on the underlying price momentum. Since the price is driven by FOMO or the ‘fear of missing out’, the volatility of these stocks tends to be very high. While investing in the Meme stocks can’t be called a Ponzi scheme, the price rise in the share price can only be sustained on the social media hype surrounding it. The price momentum can entice unsophisticated investors to get invested just as the price momentum is shifting, causing large losses for investors. While there are some investors, who can make money in this social media-driven mania, investors need to make sure that they don’t invest and get burnt as stock prices crash.