Andrey Koptelov is Technology Observer at Itransition.
So, what is a meme stock? It’s a stock that has seen a sudden increase in volume because of every other reason except the company’s performance. Most commonly, it’s social media hype or the increasing attention of online forum members that transform regular stocks into meme stocks.
One of the most recent and striking examples of this phenomenon is GameStop. Once an extremely popular video game retailer lost the majority of its market share as consumers expectedly started moving from buying physical video game copies to purchasing and downloading them online. The pandemic has only accelerated the inevitable with GameStop entirely closing its brick-and-mortar stores. Despite its terrible performance, GameStop’s shares rose by more than 2,000% in the middle of January.
It all started with shorting — a well-known investing method when traders borrow descending shares, then sell them to another investor, and then wait for the price to go down. Then short-sellers will buy these stocks back for less, return them to those from whom they originally borrowed the stocks, and keep the difference.
GameStop is a textbook example of a company whose stocks were destined to go down. Some reputable investors made a risky decision to buy a considerable amount of GameStop’s shares, causing the company’s heavily shorted stocks to climb up instead. This created a loop: ‘shorters’ started to buy their shares back in hopes of covering their positions, making the price rise further and urging other short-sellers to buy shares back as well.
The hype has also been amplified by the rise in the popularity of retail investment. In the first half of 2021 alone, more than 10 million trading accounts have been created. Experts attribute this spike in popularity to a number of factors, with the two most important ones being the pandemic and the proliferation of zero-commission stock market software. Robinhood is probably the biggest contributor, as its zero-commission model has attracted millions of young people to open trading accounts, and other brokers to significantly decrease commissions.
Another important contributing factor in this meme stock fever is a shift of attention from ETFs to individual stocks. Joshua Mitts, professor at Columbia Law School, claims that technology brings an average investor closer to the companies in which he or she invests. This can’t be more evident as this new group of customers is more tech-savvy than any other generation, and stock market software development makes individual trading more accessible than ever. Also, stocks make headlines, while ETFs rarely do.
Industry giants now consider social media sentiment tracking as an essential part of the business. For example, just a few weeks ago AMC decided to cancel its planned equity raise because of the r/WallStreetBets’ community reaction to the announcement.
Although the combination of flexibility, adaptability, and reactiveness is what often defines success in this industry, institutions are somewhat reluctant to fully embrace it. For now, it seems that they track social media sentiment not to scout for new opportunities and generate more profit, but to minimize risks.
What traditional investors need to realize is that this meme stock saga is not a one-time phenomenon driven by lockdown boredom and government-issued funds. Those tens of millions of trading accounts created in the last year have introduced a much broader audience to the stock market. As long as the market can adequately respond to this influx and possibly spread the knowledge about basic principles of safe trading, this meme stock phenomenon is more likely to have a positive influence on stock trading in the long run.