The term “meme stock” has been recently coined after the market witnessed how extreme retail interest in a stock could meteorically increase its price.
The term was established after the GameStop short squeeze, proving that a mob of individual traders could together propel the price of an asset up by orders of magnitude, by “holding for dear life” and refusing to sell.
Such stocks have seen an increase in demand and volume after being hyped up on social media forums like Reddit. Examples of meme stocks include Gamestop, AMC Entertainment and Blackberry. While all three companies have performed poorly over the last few years, their share prices reflect a different story after massive hikes in the price over 2021. AMC’s price increased by 10 times but gamestop saw its share price increasing by hundreds of dollars in just a few days.
The birth of meme stocks can be credited to the internet, social media and the speed at which word spreads. Since the price hikes are not fundamentally driven, usually after a rise in the price of a meme stock, we inevitably see a corresponding crash in the price.
Heavily shorted stocks (stocks with a high short interest ratio) are usually the best candidates to become meme stocks because they have the highest chance of squeezing out to ridiculously high prices over a very short period of time.
It can be very exciting for the prospect to increase your money by 50 times, but the risk involved in investing in such companies is also very high since involvement of retail traders can cause extreme volatility.