After the advent of Covid-19 in 2020, Meme stocks have been in the limelight for their controversy and is under constant debate, particularly in the US Stock Market. Read on the pros and cons of meme stocks for traders and what they actually are.

What are meme stocks?

Meme stocks are the shares of companies that have seen a recent surge in viral activity, which is usually fuelled by online social media platforms such as Reddit and Twitter. The buzz over a particular stock prompts retail traders to buy the stock with the knowledge that its share price will likely rise. Stocks with high short interest are frequently favoured by the meme stock community in an effort to squeeze anyone who has been shorting the stock into covering their short.

The term ‘meme stocks’ originated from the online discussion forum Reddit, where the subreddit known as ‘WallStreetBets’ has become wildly popular among stock and options traders and has recently had a major effect on US and UK-based exchanges.

How do they work?

Towards the end of January, WallStreetBets users criticized large financial institutions and hedge funds for continually shorting troubled stocks like GameStop and AMC Entertainment. This has led retailers to buy large amounts of shares in these companies to take advantage of the buy and hold method. News of the tightening went viral and attracted the attention of a large number of investors.

Here’s how the cycle works in the share market according to a user from the ‘WallStreetbets’:

1. Early Adoption Stage: Some retail investors believe that a company is undervalued, so they start placing a buy order.
2. Intermediate stage: The action begins to receive the attention of other traders, who join the process. The price of its shares went up even more.
3. Late phase / FOMO: The action has gained viral attention on social media and other online platforms. Investors who are late will buy stocks immediately, worrying about losing potential earnings. This is also where short sellers come together.
4. Profit phase: At the peak of the buy, some of the early traders began to close their positions. This creates a new phase of panic selling because investors don’t want to lose money when the stock price starts to fall.
5. Set for the next cycle: After the crash, stocks can trade sideways, with little activity for several weeks or months, until buyers regain interest.

Although retail traders may benefit from rising stock prices, on the other hand, if institutional investors or hedge funds have been shorting units of affected stocks, they may suffer losses. If hedge funds bet that the price of a stock will fall, but suddenly its stock price starts to rise, they have no choice but to buy stocks to cover their short positions to avoid losses. This enthusiasm for investors trying to buy stocks has led to what is known as a small squeeze, which can be a costly process for shorts.

Sometimes, memetic companies use the market to obtain more capital by issuing new shares and use the frenetic interest in their company to support future balance sheets. They can also do this to increase investment in strategic goals such as marketing and consumer appeal. However, during this meme stock boom, this additional stock offering didn’t have much of an impact on the investment community, and investors are still confident in their buying and holding methods.

Top 5 Meme Stocks to Watch:

GameStop (GME)

The most famous example of the recent controversy over meme sharing involves American video game and consumer electronics retailer GameStop. The company’s financial data before 2021 show that it is in a difficult situation and its stock price has been in a state of decline for a long time. At the beginning of 2021, the transaction price of GameStop is approximately $19 per share.

On the morning of January 28, the stock hit a record high of US$483, which represented heavy losses for short-selling hedge funds, prompting many brokers to restrict the trading of GameStop and other related stocks until the end of the volatility period. Even so, its stock price plummeted to $40 a week later, and then peaked again a month later. As of mid-2021, GameStop is up 1,187% year-to-date and the volatility surrounding the company still exists, so if you’re looking for a meme action with higher volatility, then this may be the action.

AMC Entertainment

Another struggling company whose share price has skyrocketed is the US-based theater chain AMC Entertainment. Before 2021, AMC Entertainment was considered a low-priced stock with a trading price of approximately $ 4 per share. Following the GameStop frenzy earlier in the year, traders also turned their attention to other companies with high short positions, resulting in AMC’s share price reaching a high of $ 36 at the end of March.

Throughout May 2021, the company’s share price rose 570%, reaching the highest closing price of $ 63.97. It is often at the top of the list mentioned by WallStreetBets and is one of the most popular meme stocks this year, with an annual increase of 823%.

BlackBerry (BB)

With short-term interest reaching a four-year high, another troubled company on this meme stock list is BlackBerry Limited, a Canadian company that specializes in security and enterprise software services. It is also the parent company of the BlackBerry mobile phone manufacturing brand. Before the meme stock boom, the company was trading at about $9, when its stock price more than tripled to a 52-week high of $28.77.

BlackBerry’s share price rose sharply in May 2021, an increase of nearly 55%. In the same month, the company announced a five-year partnership with the University of Waterloo to promote R&D and innovation in Canada. This may indicate that BlackBerry will launch exciting new projects in the years to come, making this a must-watch.

Nokia (NOK)

Among the five publicly traded meme stocks, Nokia has the largest market capitalization and global influence today, with operations in more than 130 countries/regions around the world. Therefore, some investors may not only see Nokia as a memetic stock but as a company with long-term investment potential, thereby splitting investor sentiment.

Bed, Bath and Beyond (BBBY)

Bed Bath & Beyond stock had fluctuated for a long time before the mania meme began, and the company was forced to close more than 20% of its stores in the United States in 2020. As of June, this retailer household goods has increased by approximately 60% in 2021 compared to the previous month.

Although Bed Bath & Beyond proved to be a trend mimetic action of rising share prices, CEO Mark Tritton does not believe that stock market activity will have an impact on the company’s operations. They also don’t emphasize a preference for long-term investors or short-term retail traders, so this may be an action that both traders should pay attention to.

Source: CMC markets