Meme stocks and the internet culture around them can seem foolish, but their wins and losses are no joke. Learn about what meme stocks are, how they work, and if they’re a good investment option for you.
There’s a good chance you have seen the term “meme stock” splashed across headlines in the past year — even if you aren’t actively following business news.
The meme stock craze, driven largely by investors on social media platforms and in online forums like Reddit, caused certain stocks to go viral. Perhaps the most famous was the WallStreetBets Reddit thread that encouraged people to buy GameStop and AMC Entertainment stock at the beginning of 2021. But what exactly is a meme stock and should they be included in your investment portfolio?
Meme Stocks and Their Origins
A meme stock, also known as a “story stock” is any publicly traded company that has received an inordinate and sustained amount of attention from social media communities. These conversations can take the form of developed narratives, memes and other additional content shared with the intent of generating awareness and engagement.
The term “meme stock” was coined in 2013 by an investor named Josh Brown who created an investment fund based on internet memes called Ritholtz Wealth Management. This fund used a combination of fundamental analysis and technical analysis to invest in companies that had been affected by memes or other online trends.
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. The popularity of this type of investing has grown over time as more people try to capitalize off of internet trends and popular culture.
Meme Stock Background
In 2020, Gamestop became the first meme stock. While meme stocks were not new to the market, activity has been 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.
In addition to the Robinhood debacle, some traders have turned to other platforms that offer similar features, such as eToro or Coinbase Pro. However, these too have struggled to keep up with demand for meme stock trading activity as seen during the COVID-19 lockdown period.
Are Meme Stocks Worth Investing?
The most common way a meme stock becomes a meme stock is through the internet’s affinity for certain companies. These memes can range from the silly to the serious, but all of them involve some kind of public interest in a company. They can be as simple as an image macro or as complex as a multi-part comic strip.
The stock market is a tricky place, and it can be difficult to know what you’re getting into. Once a meme stock has gone viral on social media, investors buy it in hopes that its value will continue to rise. But if you sell the stock you borrowed for $10, and then its price rises to $50, you’re responsible for those shares—meaning you’re on the hook for that $40 you owe the broker. And if the stock price rises to $500? Yep: You’ll owe that difference too. Like it or not, social media has the potential to influence a lot of people — but that doesn’t mean you should let it dictate how you invest your money.
Finally, the extreme volatility of meme stocks is no joke. As of this year (according to an Investor’s Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith), the value of these meme stocks is down $191 billion from the time they, as a group, peaked on Feb. 9, 2021. And they’ve lost $177 billion in value in just the past month. Ouch. The analysis looked at the updated 25 most-popular stocks with meme traders plus those most highly shorted compiled by Solactive for the new Solactive Roundhill Meme Stock ETF (MEME).
Where to Put Your Money Instead of Meme Stocks
Though the idea of amassing crazy wealth overnight is obviously appealing, the reality is that the odds are heavily stacked against anyone trying to outsmart the market. Investing should be easy – just buy low and sell high – but most of us have trouble following that simple advice. There are principles and strategies that may enable you to put together an investment portfolio that reflects your risk tolerance, time horizon, and goals. Understanding these principles and strategies can help you avoid some of the pitfalls that snare some investors.
Instead of actively trying to find the next hot stock, you could be better off with a more hands-off approach of index investing. S&P 500 index funds can be favorable over meme stocks for a few reasons. First, they’re naturally diversified — meaning that when you buy shares of one of these funds, you effectively get to add 500 different companies to your portfolio at once. There’s also the reassurance that the companies that make up the S&P 500 are generally established ones, and many have been around for over 100 years. Finally, S&P 500 are positioned for excellent growth. By contrast, today’s meme stocks are more speculative. (Of course, all investing involves some amount of risk.)
Final Thoughts
For those still itching to trade the next viral stock, invest only with money you can afford to lose. Before you invest, you should make sure you already have an emergency fund set aside, you’ve paid off your high-interest debt and you’re already contributing to a retirement account (and meeting any 401(k) employer match, if applicable).
Nowadays, it can be difficult to know if the latest meme stock or cryptocurrency is here to stay or just a fad. It’s important for advisors to stay up to date with what is happening in investing and trading. Fiduciary Matthew P. Johnson, President and Owner of Johnson Wealth and Income Management is here to help you every step of the way. Matthew has been working with his clients since 1999, helping them achieve their investing and financial goals. So he’s seen a few investing trends come and go in his time! Together with his team of Fiduciary advisors, Johnson Wealth & Income Management knows our clients deserve first-rate investment performance, thoughtful strategic advice and the highest level of service.
Are you ready to build and manage a portfolio to meet your personal financial goals? Contact us here to learn how we can help you reach those goals through different investment strategies today.
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