If you’ve been following the news, you’ve probably heard of how a bunch of Redditors on the WallStreetBets subreddit ravaged professional hedge fund managers.
Along the way, some of these Redditors have become instant millionaires. This unlikely event gave rise to the term “same stock”. But what exactly is a stock of memes? And is it a wise investment? Learn more below.
It is not financial advice. If you are interested in any form of investing, you should contact a licensed financial advisor who can give you the best advice based on your needs and risk appetite.
What is a stock of memes?
Previously, stock trading was the sole responsibility of professional traders. If you were a simple Joe looking to buy and sell a stock, you should go through a phone trader who could give you professional advice.
But as stock trading apps have become widely available, they have made it possible for just about anyone with a smartphone and an internet connection to trade. And if you combine that with social media platforms like Reddit, you have the perfect recipe for a stock of memes.
Meme stocks are stocks traded by individual investors on the basis of online forums and discussion forums. These trades are not based on in-depth analysis of the business, trading patterns, or other fundamentals. Instead, they’re usually fueled by speculation, the tendency, or even the collective thought to want to beat the pros at their own game.
What was the first stock of memes?
The first stockpile of memes was GameStop. It all started when hedge funds started selling their stocks short due to store closings nationwide. A short is when you buy a stock in the hope that its price will go down.
For example, you see the price of GameStop is $ 100 per share. But since they are closing several stores, you think it will go down further. So what you do is borrow ten GameStop stocks from your broker and then sell them at market price, earning you $ 1,000.
If the stock price drops to $ 50 per share the following month, you can buy back all ten shares for $ 500 and then return them to your broker. You have then won $ 500 betting that the stock price will go down.
But if the stock price goes up to, say, $ 150, then you have to buy back the ten stocks you borrowed for $ 1,500 to return them to your broker. You then lost $ 500 because the stock price did not go down as you expected.
This is precisely what many hedge funds have done (and still do!) With GameStop and several other stocks. This is a high risk, high reward scenario. It’s very profitable because you make money even if the market goes down, and it’s high risk because your losses are endless if the price goes up instead.
It all started in a subreddit called r / WallStreetBets.
As of September 2021, it had over 10 million members, with tens of thousands of users online at all times. According to its FAQ page, WallStreetBets “is a community for making money and having fun doing it. Or, realistically, a place to come and vote for memes when your wallet is down.”
So while you can use it to find trading tips (which may or may not be reliable information), it is mostly a place where you can get memes and investment-related entertainment. Until one day they got wind of how some big hedge funds were short selling GameStop stocks.
It turns out that around 140% of GameStop shares have been sold short, meaning that hedge funds have borrowed more shares than there is actually stock available. On January 22, 2021, Citron Research predicted that the stock’s value would decline.
Coincidentally, that’s when r / WallStreetBets members started mass buying GameStop shares. This led to a short squeeze, where short sellers had to buy back large amounts of stocks to reduce the risk of increasing their losses.
Since large amounts of short GameStop shares had to be repurchased, this further increased the upward pressure on its share price. Ultimately, this event caused the GameStop share price to increase by 600%, allowing several retail investors to make millions with their bets. At the same time, this short tightening has put several hedge funds in difficulty.
Are Meme actions safe?
The sudden and unexpected increase in GameStop shares, which created a few new millionaires, gave birth to the term “memes shares”. The big news networks and even some famous entrepreneurs have jumped into the game, which further piqued their interest.
However, it is not a recommended investment for regular investors. In order for you to make massive gains in a memes stock, there should be the right mix of speculation, luck, and maybe a small dose of vengeance against institutions. That’s why the subreddit is called WallStreetBets – it’s a bet you have to make.
At the very least, you should know how to invest before you venture into meme stocks. While you have the chance to win big if you bet at the right time with the right stock, you also stand to lose a lot of money if you bet wrong or invest at the wrong time.
Meme Stocks yesterday and today
As of now, there are only three publicly recognized memes actions: GameStop (NYSE: GME), AMC (NYSE: AMC), and Nokia (NYSE: NOK). GameStop was the one that started it all, with a stock price hitting over $ 347 on January 27, 2021, down from $ 39.12 seven days earlier.
AMC quickly followed suit, with its share price hitting $ 19.90 the same day, down from $ 4.96 the day before. Nokia also rose to $ 6.55 per share, from $ 4.20 the week before. While these gains are fascinating, they are generally unsustainable unless the underlying company changes to improve its situation.
If you look at GameStop’s stock prices on September 3, 2021, you’ll see they’re significantly lower at just over $ 200. Nokia’s stock price also fell to $ 4.69 the day after it peaked at $ 6.55. It only recently rebounded to over $ 6 after several months of steadily rising share prices.
Only AMC outperformed the initial rise of $ 19.90 per share. It is now trading at over $ 44 a share – and is likely due to the economic reopening of Covid restrictions.
Only invest what you can afford to lose
Any investment is a bet, a calculated risk. That’s why you shouldn’t put money that you can’t afford to lose on the stock market. It is best to ask professionals, especially if you are not knowledgeable about the stock market.
And if you want to make a lot of money fast, know that this carries a substantial risk. As many people say, the higher the reward, the higher the risk. If you can afford to lose it, you may want to consider investing in stocks even. But if it’s for something important (like your grocery store or your retirement fund), then you better play the long game.
Want to start investing? Thinking of using the Robinhood app? Here are several reasons why Robinhood is bad for investing.
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