What are Meme Stocks and how do they work?

Meme stocks are back again! Find out what they are and how they work.

If you are on social media or have spent any time on the internet in the last few years you’ve likely seen a meme. That widely shared ‘picture-says-a-1000-words’ image or video paired with a witty comment that is changed to reflect the cultural conversation of the time. It probably made you chuckle and then you likely thought nothing more of it. But somehow this internet trend has infiltrated the investing world – and now we have meme stocks. If just the notion of meme stocks leaves you perplexed, don’t fret we’ve got you covered!

What are meme stocks?

Meme stocks are popular stocks that are driven by hype, typically from everyday investors who are active on Reddit or TikTok. These stocks often see substantial price gains despite lacking in any fundamental backing or analysis. As the stock gains more notoriety and their prices continue to rise more investors jump on board due to FOMO (fear of missing out). They are referred to as meme stocks as, just like their namesake, they tend to have a cult-like following among social media communities.

Game stop: The original meme stock

So, how did this all begin? You may remember in early 2021 GameStop was all over the news. The American video game retailer’s shares soared due to young tech-savvy individuals who went head-to-head against hedge funds shorting GameStop stock. Using online forums like Reddit and investing apps like Robinhood, they drove a 1600% share-price rally of the struggling video game retailer. It was largely seen as retail investors leading a revolt against Wall Street, with some hedge funds losing $1 billion dollars a day as they betted against GameStop.

However, some would argue that meme stocks are less about ‘sticking it to the man’ and more about making profits quickly.

How do meme stocks work?

According to Nasdaq Inc., meme stocks tend to go through stages:

Early Adopter Phase: A large number of retail investors identify a stock that they believe is undervalued and begin to buy in large quantities. The stock’s price slowly begins to increase.

Middle Phase: The growing share price attracts other investors, and more people then start buying in causing the stock’s price to skyrocket.

Late/FOMO (Fear of missing out) Phase: At this stage the stock has gained viral attention and word about the stock spreads across social media and online forums. Investors late to the process purchase shares in fear of missing out on potential profits. The stock is taking off at this point.

Profit Taking Phase: Typically, after a few days, buying peaks, and the early adopters begin cashing out. This tends to create a new panic-selling phase as people fear losing money when prices begin to fall.

Related article: After Gamestop: How people power can shape the future of financial service

Meme stocks examples

Today, more meme stocks are emerging, particularly in the US, as ordinary, everyday investors have got behind some struggling companies, such as:

• AMC Entertainment (NYSE:AMC)
• Bed, Bath and Beyond (NASDAQ:BBBY)
• Weber (NYSE: WEBR)
• Magic Empire Global (NASDAQ: MEGL)
• BlackBerry (NTSE: BB)
• Nio (NYSE: NIO)

Meme stocks on the ASX

The meme stock craze that is well and truly alive in US markets has begun spilling over onto the ASX as well. Some local stocks that have been hyped across social media and internet forums include:

• Archer Materials (ASX:AXE)
• Brainchip Ltd (ASX: BRN)
• Sezzle Inc (ASX: SZL)
• Block Inc. (Afterpay) (ASX:SZL)

How to buy meme stocks?

To access meme stocks that trade on the NASDAQ or New York Stock Exchange (NYSE) you’ll need to find a broker that allows you to trade in US markets. There are several brokers in Australia that provide access to international shares. However, before committing to a platform you should do some research and consider a range of factors, including: fees, both for making trades and any ongoing fees charged for using the platform and features, such as the customer service, educational resources on offer and research tools.

Buying meme stocks on the ASX

If sticking to local markets is more your thing, then you will still need to engage with a broker or an online share trading platform. These services enable investors to buy and sell shares and monitor the performance of their portfolio. Many of the well-known Australian banks offer a share trading service, but there are also a number of specialist providers to choose from.

Related article: How to buy shares online in Australia

Should you invest in meme stocks?

Investing in meme stocks is particularly risky as they are quite volatile and driven purely by hype instead of fundamentals. While meme stocks offer an opportunity to see large profits they also pose the risk of large losses. It is generally recommended to thoroughly research companies you are looking to invest in and consider your investment strategy, personal circumstances and goals.

Cover image source: Michael Vi/Shutterstock.com