Saturday, Jun 10, 2023

What are meme stocks and why are they back?

What are meme stocks and why are they back?

The trading phenomenon that saw individual investors inflate stock prices despite company performance is back.

Meme stock mania, born during the peak of the coronavirus pandemic, has turned the tables on institutional investors by banding retail day traders together via social media to pump the stock of companies Wall Street bets against.

This new generation of traders, assembling on websites like Reddit’s popular WallStreetBets forum and using commission-free trading apps like Robinhood, made headlines after they catapulted the stock price of flailing video game retailer GameStop.

Shares surged from $3 in 2020 to past $300 at the end of January 2021, causing historic market volatility and substantial losses for short-selling hedge funds.

Jamie Rogozinski, the founder of popular online stock market chat forum WallStreetBets, which boasts 12.5 million members on Reddit, told Al Jazeera that retail traders were just reacting to the times. “The government forced everyone home, sent them stimulus cheques, took away people’s entertainment, their sports, their everything. The natural progression was for people to turn to stocks and trading.”

Retail investors who have engaged in the meme stock frenzy are known for targeting struggling businesses, and there is good reason for that, explained Edward Moya, a senior market analyst at OANDA.

“The retail trader has been trying to find opportunities to stick it to the hedge funds,” he told Al Jazeera.

What is a meme stock?

A meme stock is one that becomes well-known among individual investors thanks to social media.

A group of day traders on a social media site such as WallStreetBets identifies the stock and coordinate with others within their online community to buy shares to inflate its price with the intention of selling it before it falls. They usually target companies that Wall Street has bet against. The rise in stock price usually has little to do with the company’s performance.

An AMC theatre is pictured in the Manhattan borough of New York City, New York, US  the chain became a meme stock in 2021 and used the capital to rebuild its business

When did meme stocks become a thing?

The meme stock frenzy made headlines in January 2021 with video game company GameStop. Day traders organising on Reddit caused the stock to soar. The traders gained a lot of attention because they caused Wall Street institutional investors, many short-selling hedge funds, to lose millions of dollars.

What is short selling?

Short selling is borrowing a stock through a broker with the expectation the price will fall. When it does, the buyer returns it and profits from the difference between the first price and the second, lower price.

What’s a short squeeze?

A short squeeze is when investors who have bet against a stock with the assumption that it will fall, see the price rise. So when Reddit’s WallStreetBets asks retail day traders to buy GameStop stock, thereby driving the price higher, hedge funds caught in a short squeeze can either close out their bets and eat their losses or try to ride out the price surge which usually means they have to put up more money.

WallStreetBets is a popular forum on Reddit where users congregate to discuss stocks

How do meme stock traders pick the companies they target?

Rogozinski of WallStreetBets explains the strategy: “They have a rival, the big bad hedge funds that are shorting and trying to get rid of their beloved, in the case with GameStop it was video game company, something that this demographic relates [to]. So you have this really nice story of good and evil. David and Goliath. This video game store, I love it, I grew up playing Mario Brothers and I’m not going to let you take it away.”

Has Wall Street taken advantage of the meme stock buzz?

Yes. Analysts say that Wall Street is making a profit even if the initial meme stock frenzy took a bit of getting used to.

“In some cases, it’s been easy money,” OANDA’s Moya explained. “When meme stocks started to evolve, you had all the hedge funds say, ‘OK, I don’t believe in this strategy, there’s so much opportunity here to take advantage of getting in, maybe not necessarily before the retail traders, but getting out before them. That’s where the money is.”

Has meme trading evolved in the past year and a half?

With record high inflation and a possible recession on the horizon, retail traders are changing their behaviour, Moya told Al Jazeera.

“They’re really kind of trying to become more a pump-and-dump scheme,” he said. “This is not what we saw before where people were saying they’re gonna hold GameStop forever or AMC forever. Now it’s more of a targeted strategic bet.”

A meme found on Reddit’s WallStreetBets, where 12.5 million users communicate through humorous references to popular culture that drive day traders to buy stock of certain companies

Are people actually making money off meme stocks?

Just as with any investment, it depends on the timing of what you bought and sold. Some individual investors made great gains in GameStop, while those who have it now would be operating at a loss.

“If you were to select a person who held a position in GameStop at random at the frenzy’s peak, it is not obvious that that person made money over the course of the GameStop episode. Lots of people kept holding the stock on principle far longer than they should have,” Alex Chinco, professor of finance at Baruch College, told Al Jazeera.

Why the resurgence in meme stocks now?

Widespread inflation has made everyone a lot poorer, OANDA’s Moya explained to Al Jazeera.

Millennials and Generation Z are buying houses, have a tonne of student loans to pay back, and cannot afford to be loose with their financial investments. But in the same vein, retail trading around meme stocks provides an opportunity to go against the grain. And “with so much pessimism around Wall Street, a lot of young people are not expecting the stock market to provide as many opportunities for long-term bullish bets”, Moya added.

Rogozinski added: “There is this mindset of the do-it-yourself social media influencers and it’s also about the gig economy, where people have a job and they’re still doing hustles on the side. You have these people saying, ‘I don’t need to pay somebody else to control my money’.”

A customer walks into a Bed Bath & Beyond store in Novi, Michigan, US – the company is one of several that saw its shares spike driven by support by individual investors coordinating online

Have meme stocks affected the wider market?

It looks like Wall Street may be catering to this new crowd.

“The New York Stock Exchange and global markets companies are starting to create derivatives and products that are cheaper and smaller,” Rogozinski said. “They’re making small versions of futures, micro-stock options, which are a tenth as leveraged so it’s not as dangerous. There’s really no financial justification for these products to exist, other than to make things more accessible to this particular demographic.”

Is anyone regulating this stuff?

The Securities and Exchanges Commission (SEC), the US federal regulatory agency, has looked into meme stocks and Congress held a hearing on it, but so far no action has come of it.

In June 2022, the US House Committee on Financial Services published its findings in a report (PDF), warning of the inadequate risk management which led up to the meme stock trading frenzy. The committee also called on regulators to boost capital and liquidity oversight, improve supervision of retail-facing “superbrokers” and try to better understand how retail traders operate.

AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.

Related Articles

US and European Intelligence Agencies Uncover Evidence of Ukrainian Role in Terror Attack on Nord Stream Pipeline
Nvidia Joins Tech Giants as First Chipmaker to Reach $1 Trillion Valuation
Drone Attack on Moscow's Wealthiest Neighborhoods Suspected to be Launched by Ukraine
UK Prime Minister Rishi Sunak to Hold Power Talks with President Biden in Washington
AI ‘extinction’ should be same priority as nuclear war – experts
Prominent Hacker Forum RaidForums Suffers Substantial Data Breach
Nvidia CEO Huang says firms, individuals without AI expertise will be left behind
WPP Revolutionizes Advertising with NVIDIA's AI Powerhouse
Two US Employees Fired For Chasing Robbers Out Of Store As They Broke ''Company Policy''
If you donated to BLM, you got played
Pfizer, the EU, and disappearing ink - Smoke, Mirrors, and the Billion-Dose Pfizer Vaccine Deal: EU's 'Open Secret
Actor Tom Hanks told Harvard University graduates to be superheroes in their defense of truth and American ideals, and to resist those who twist the truth for their own gain
The Sussexes' Royal Rebound: Could Harry and Meghan Markle Return to the UK?
A provocative study suggests: Left-Wing Extremism and its Unsettling Connection to Psychopathy and Narcissism
France Arrests 10 on Suspicion of Failing to Respond in Time to Migrant Drowning
Neuralink Receives FDA Approval for First-in-Human Clinical Study
Saudi Arabia and Canada Restore Diplomatic Relations
Bernard Arnault Loses $11.2 Billion in One Day as Investors Fear Slowdown in US Growth Will Reduce Demand for Luxury Products
Russian’s Wagner Group leader: “I am not a chef, I am a butcher. Russia is in danger of a revolution like in 1917.”
TikTok Sues Montana Over Law Banning the App
Ron DeSantis Jumps Into 2024 Presidential Race, Setting Up Showdown With Trump
Last Walmart in North Portland Closing Down
Florida's DeSantis seeks to disqualify judge in Disney case
Talks between US House Republicans and President Biden's Democratic administration on raising the federal government's $31.4tn debt ceiling have paused
Disney has canceled plans to build a new campus in Florida worth almost $1 billion
Biden Administration Eyeing High-Profile Visits to China: The Biden Administration is heating things up by looking into setting up a series of top-level visits to Beijing by top officials in the coming months
New evidence in special counsel probe may undercut Trump’s claim documents he took were automatically declassified
A French court of appeals confirmed former President Nicolas Sarkozy's three-year jail term for corruption and influence peddling
Debt Ceiling Crises Have Unleashed Political Chaos
Weibao Wang, a former software engineer at Apple, was charged with stealing trade secrets related to autonomous systems, including self-driving cars
Mobile phone giant Vodafone to cut 11,000 jobs globally over three years as new boss says its performance not good enough
Elon Musk compares George Soros to Magneto, the supervillain from the Marvel Comics series.
Warren Buffett Sells TSMC Shares Over Concerns About Taiwan's Stability
New Study Finds That Secondary Bacterial Pneumonia Is a Major Cause of Death in COVID-19 Patients Who Require Ventilator Assistance
King Charles III being crowned.
'Godfather Of AI' Geoffrey Hinton Quits Google To Warn Of The Tech's Dangers
A Real woman
Vermont Man Charged with Stalking After Secretly Tracking Woman with Apple AirTag
Elon Musk Statements About Tesla Autopilot Could Be 'Deepfakes,' Lawyers Claim. Judge Evette Pennypacker Does Not Understand How Far and Advanced This Technology Became
Ukraine More Prepared for Counterattack as Reinforcements Arrive
UK Prime Minister Rishi Sunak and Italian Prime Minister Giorgia Meloni Discuss Migration, Defence, and Ukraine
Tucker Carlson is back, soon!
AT&T's Successful Test of Satellite-Based Phone Call Raises Possibility of Widespread Coverage
CNN: "Joe Biden is asking for four more years — when 74% of Americans think the country is heading the wrong way“
Turkish President Recep Tayyip Erdogan Cuts Short Live TV Interview Due to Health Issue
US Congresswoman threaten Twitter Files journalist with arrest
Pulitzer Prize-winning journalist Seymour Hersh slams New York Times' pro-government stance and treatment of sources
Enough is enough: it's time to end the war in Ukraine. While Russia may be to blame for starting it, Russia is not the one refusing to stop it
Fox News Settles their case with Dominion Voting Systems for a staggering $787.5 MILLION
The land of the free violence