What are meme stocks and how do you trade on them?

What are meme stocks?

Meme stocks are company stocks that experience rapid and often unexpected share price growth due to the attention of a dedicated online following. One of the most popular examples is GameStop.

These stocks’ movements typically defy conventional market predictions and can maintain elevated prices regardless of the company’s market cap.

There are no official meme stocks criteria yet, but they’re usually pushed by online communities of millennials, for example, who gather on forums like Reddit and other social media platforms. Through coordinated buying and selling, they’re able to influence share prices.

Meme stock traders typically don’t have a professional background or know how to conduct financial analysis. Their motivation behind rallying around a meme stock is usually to make big profits from unprecedented price movements.

How did meme stocks start?

The first meme stock to become extremely popular was GameStop, which took off in 2021. Two big hedge funds and numerous traders started shorting the online video game retailer in 2020 after rumours of upcoming bad results.

A Reddit user posted a video in August that year detailing GameStop’s plans to revamp its business model, as well as the significant way the company was being shorted.

Reddit forum r/wallstreetbets rallied around the company – calling for aggressive option buying of its shares. This dramatically increased the price of the stock and short squeezed the hedge fund traders. Some hedge funds suffered significant financial losses, while some retail traders made millions.

Other significant meme stocks in recent months include AMC Entertainment , Blackberry and Bed Bath & Beyond.

Social media and the stock price

Social media’s effect on financial markets are increasingly undeniable and powerful. The attention of an online community like Reddit can either make stock prices soar or cause them to plummet when traders start shorting them.

Other social media sites like Twitter, LinkedIn, YouTube and Facebook also exert their own influence on stocks. In 2019, for instance, electric car company Tesla saw its share price rise by 7% after CEO billionaire Elon Musk published a Tweet about securing funding to take the company private at $420 per share.

With Facebook, traders sometimes use Facebook’s sentiment metric – called the Gross National Happiness Index – to predict the returns of different stock markets across the world for the next day.

In terms of research and performing due diligence, traders increasingly use LinkedIn to mine information. Video streaming service YouTube has become a hotbed for content creators to share tips, information, analysis, and trading tutorials.

Key meme stock terms

Meme stock communities are distinguished by terms they came up with or use regularly. Here are a few key meme stock terms and their definitions:

• ATH: an acronym for ’all time high,’ usually used for cryptocurrencies. It refers to the highest price any given asset has ever reached on the open market
• Diamond hands: holding on to an asset or stock despite any volatility or risks around it. Someone with diamond hands typically resists selling their shares when prices fall or rise
• Paper hands: the opposite to diamond hands – someone with paper hands panics and sells their shares at any signs of a dip or rise in prices. They typically take losses because they fold easily
• FOMO: an acronym for ‘fear of missing out’. This refers to individuals purchasing stocks because they see others doing it, and fear that they’ll miss out on an opportunity to make money
• Tendies: short for ’chicken tenders‘, a shorthand way of talking about gains, profits or money made on the stock market
• To the moon: a stock with a rapidly rising share price, seemingly with no limits, is said to be going ‘to the moon’
• Bag holding: when someone holds onto their shares position that’s fallen in value and keeps falling, thinking it’ll recover, when it likely won’t. Eventually, they’re left holding worthless positions

Are meme stocks a good investment?

Meme stocks can be a good investment if you buy and sell at the right time. Trading meme stocks in shares CFDs, you can take long or short positions depending on the direction of the share price.

It’s important to note that, due to their rapid price movements (aka volatility), you could experience rapid gains and losses, so risk management is key.

As meme stocks' driven by internet virality, meme stocks typically undergo some common cycles:

• In the early adopter phase, traders who think a stock is undervalued or over-shorted start buying
• Next is the early interest phase, where those who pay attention to finance media start noticing a movement in the share price of the stock and buy in
• After that, the massive buying or selling phase. This is when the stock has gained significant attention from the public and they get involved as to not to miss out
• Finally, the stock may experience ‘flash selling’, where traders close their positions, and the share price falls

These cycles can happen as quickly as over a few days, so timing the market is crucial here. Before you open any position, you should understand how to manage your risk. Our risk management guide provides valuable information.

How to trade on meme stocks

With CFDs, you can trade meme stocks by taking a position on share price movements without taking direct ownership of the share. Here’s how to trade on meme stocks with us:

1. Create a CFD trading account or log in
2. Pick the stock you want to take a position on
3. Set your position size and manage your risk
4. Open and monitor your position

We offer CFD trading on over 13,000 markets. CFDs are leveraged derivatives that enable you to go long or short on meme stocks without owning any shares outright. Because it’s leveraged, you can open a position using margin. This will amplify both profits and losses – so manage your risk carefully.

Meme stocks you can trade on

Here are some of the most popular meme stocks in recent times:

AMC Entertainment

AMC is a US cinema chain listed on the New York Stock Exchange (NYSE) and the largest movie theatre company in the world. It became a meme stock in 2021 when Reddit users pushed its share price up by more than 120% to short-sell professional hedge funds and big institutional firms.

Trade AMC Entertainment

Blackberry

Blackberry is a Canadian company known for creating interactive pagers, smartphones and tablets. More recently, it expanded into cybersecurity. Reddit-driven buy-ins turned BlackBerry into a meme stock in 2021.

Trade Blackberry

Bed Bath & Beyond

Bed Bath & Beyond is a US chain of domestic merchandise retail stores counted among the Fortune 500. It became a meme stock mid-August 2022, after its value surged from users on Reddit discussing the stock more frequently.

Trade Bed Bath & Beyond

Tesla

Tesla is the world’s dominant electric vehicle company, owned by billionaire CEO Elon Musk, who is also a frequent social media user. As a result, Tesla has always had a great deal of online attention. It became a meme stock in 2021 when its share price rose after Musk tweeted about it going private.

Trade Tesla

What are meme stocks summed up

• Meme stocks are characterised by rapid and often unexpected share price growth due to the attention of a dedicated online following
• Social media’s effect on the financial markets is undeniable – with Reddit, Twitter, Facebook and others influencing traders
• Some of the most popular meme stocks include GameStop, AMC Entertainment, Blackberry, Bed Bath & Beyond and Tesla
• You can trade on meme stocks with us using CFDs

Footnotes

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