What are Meme Stocks? Risks and Rewards Explained

With the ticker symbol MEME, the exchange-traded fund tracked the performance of stocks with elevated social media activity and high interest from short sellers. In late January 2021, regulators began monitoring trading activity for meme stocks. Concerned about potential market manipulation and overall stability in the financial markets, the U.S. Securities and Exchange Commission (SEC) and other financial watchdogs started closely observing how meme stocks were being traded. At the height of meme stock frenzy, Robinhood—the upstart brokerage that, a few years earlier, led the charge on zero-commission stock trading—and other major brokerages throttled trading of several major meme stocks. The financial institutions cited the need to meet financial requirements imposed by stock clearinghouses.

However, the stock fell steeply following the company’s announcement of the plan. Short selling is the process of selling borrowed stock at the current price, then closing the trade by purchasing the stock at a future time. What this means is that, if the price drops between the time you enter the trade and when you deliver the stock, you can turn a profit minus any fees or expenses.

With enough online support, meme stocks can maintain elevated stock prices regardless of the underlying company’s worth. During this same time, many first-time, young traders were investing via relatively new mobile trading apps that have lowered some of the traditional barriers to investing. Forex fibonacci strategy Many of these trading apps also eliminated commissions charged to the individual trader when executing a trade, and they lowered or eliminated the minimum account balance usually required by traditional brokerage firms.

Meme Stocks Explained: What Are They and Why Do They Matter?

However, there seems to be little connection between a company’s meme stock status and its actual performance or prospects. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site.

Despite the actions of Robinhood and other brokerage firms, new downloads of those apps skyrocketed after the events surrounding the GameStop stock. The Robinhood app alone was downloaded more than 1 million times in the last week of January, when the stock surged and then later declined, according to a number media outlets, including Barron’s. Word travels fast on the internet, and when a stock goes viral by word of mouth, it tends to see rapid price spikes.

Every retirement article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of investing products. As the price of the shorted stock rises, the short seller will begin to experience losses. These losses must be covered in a timely fashion, often prompted via margin calls, whereby the broker demands funds to make up for those paper losses. A meme is an idea or some element of popular culture that spreads and multiplies across people’s minds. Memes gained increasing prevalence and relevance as the internet and social media grew. They allow people to rapidly spread humorous, interesting, or sarcastic videos, images, or posts to others around the world.

1. When an investor or trader is shorting a stock, it means they’re wagering that the price of the shares will fall.
2. Meme stocks, however, didn’t truly emerge until the year 2020 via the Reddit forum r/wallstreetbets.
3. Historically, the average annual return for the S&P 500 hovers around 10%.
4. While some Reddit traders were able to make a lot of money in a short amount of time by buying and then selling AMC and/or GameStop at the exact right moment, investing in meme stocks is generally very risky.
5. At Bored Panda, you’ll find me covering topics ranging from the cat meme of the day to red flags in the workplace and really anything else.
6. It even specifies that the draught-victim would be immune from both debt repayment and interest repayment for a year.

Changes in the Price and Demand for Stocks

Investors and institutions will study the events of that time for decades as immense fortunes were made (and lost) in just a few weeks. While meme stocks are fizzling out today, it’s important to understand how the craze download historical usd to hkd rates came about and whether these companies are still worthy of our capital in the present day. Another reason for the initial meme stock trades may have been that interest rates were near record lows. Cash offered almost nothing in the way of a return, so trading stocks may have felt like a way to earn something, despite its high risk. But in 2024, interest rates are much higher and savers earn decent yields on the cash they hold.

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In this and other forums that have popped up since, users work together to identify target stocks and then promote them, while also putting their own money to work. Kristin Cavallari’s ex-boyfriend Mark Estes looked like he had no problem moving on in a new video posted by Love Island USA’s Olivia “Liv” Walker. The reality star, 22, shared a video via TikTok on Friday, November 22, that featured herself and Mark, 24, goofing around in a variety of clips set to the popular… The trend underscored how rapidly coordinated buying and selling could lead to extreme price volatility, drawing the attention of regulators and the broader financial industry. Tuesday morning, AMC announced it had raised $250 million off the run-up in its stock value from the near-doubling of its share price Monday (though it was just $3 to $5 per share). But on Monday, one of the chief meme-stock cheerleaders, known by the online moniker Roaring Kitty, posted a meme signaling he was planning to become active again.

This hire the best freelance razor developers updated daily has allowed more individual and younger investors to enter the market, and some of these new investors are showing interest in meme stocks. Investing in meme stocks may provide short-term gains due to sudden price increases spurred by social media. Some investors appreciate that meme stocks give retail investors a chance to influence markets.

In a traditional buy-and-hold strategy, investors seek stocks whose shares appear undervalued relative to the company’s fundamental worth or growth potential. In contrast, prices of meme stocks are closely tied to sentiment and chatter among day traders on the Internet, rather than the value of the underlying business. Simply put, meme stocks skyrocket in price in a short period (often hours or days) because of a sudden surge in interest online or on social media and subsequent buying among small individual investors.