If you’ve ever been on social media, I am sure you are familiar with memes, which are humorous videos or pictures. In the past year, meme stocks have become a new phenomenon that has swept across the stock market.
Meme stocks are stocks that significantly fluctuate in value based on social media statements and discussion. They are mostly popular with retail investors, like you and me. In case you’re wondering, the opposite of retail investors are institutional investors, who invest large amounts of money on behalf of their clients. Most investment firms are institutional investors.
In early 2021, meme stocks became the center of almost all stock market attention. In fact, GameStop and AMC became two of the most popularly traded meme stocks. Retail investors on the social media platform Reddit were making suggestions for stocks that people should buy. As people read these posts, they began buying significant amounts of stock that pushed their values up significantly.
GameStop saw it shares rise from closing price of $20 on January 12, 2021, to a peak closing price of $350 on January 27, 2021 — a 1,650% gain in a matter of weeks. AMC saw its shares rise from a closing price of $2.29 on January 12, 2021, to a peak closing price of $19.90 on January 27, 2021 — a 768% gain in the same period.
However, the euphoria did not last long. Shares of both companies fell more than 50% in the days following their peak closing prices.
The early 2021 meme-stock-mania prompted calls from politicians and government regulators to restrict trading in certain stocks and establish rules to prevent these events from occurring again.
While investing in meme-stocks may seem fun, it is important to understand that stock prices should reflect the value of the company. When stock prices get significantly detached from reality, it can set investors up for steep financial losses.
It is always important to thoroughly research a company before investing in it. By doing this, you can be more comfortable knowing that you made a logical investment!