What is a meme stock, and why is everyone talking about them?

Stocks going viral, what does that meme?

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Once upon a time, memes were limited to images, gifs, and videos shared on the internet to give us a laugh. But somehow, the stock market fell prey to memeification, so here we are… analysing what a meme stock is.

Defining a meme stock

A meme stock is typically regarded as a stock that lacks fundamental backing and is, more so, driven in popularity by hype. Usually, it is retail investors that drum up support for these stocks using social media channels such as TikTok and Reddit.

Once this type of stock 'goes viral', the resulting extreme share price jumps can attract even more investors as the fear of missing out (FOMO) kicks in. This momentum can then lead to a stock price that is divergent from all fundamental measures of analysis. As a result, many commentators see the valuations as humorous – thus, a meme stock is born.

Be warned – meme stocks are not for the faint of heart. The irrational speculation surrounding them is usually paired with violent volatility. Take GameStop Corp (NYSE: GME) for example. The gaming retailer's stock price increased nearly 25% between 4 June to 9 June. Then it proceeded to fall 27% the very next day.

What's all the hype about?

Meme stocks really came to prominence with GameStop. What originally began as a WallStreetBets led short-selling squeeze turned into a full retail investor onslaught. Since then, the attention has spread to several stocks that are heavily shorted – including BlackBerry Ltd (NYSE: BB), AMC Entertainment Holdings Inc (NYSE: AMC), and Bed Bath & Beyond Inc (NASDAQ: BBBY).

The reason many are now talking about these types of shares is because of the potential returns. While the risk is extreme, some speculators cannot dismiss the possible gains on offer. For instance, the US-based movie theatre chain AMC Entertainment has returned 2,837% so far this year. While the valuation may look like a joke, for those who managed to achieve them, the returns are certainly no laughing matter.

However, the catch is, to really capture the upside, you must be among the early speculators. Once a stock reaches the late or FOMO phase, it's often too late. Because of this, many speculators are constantly on the hunt for the next GameStop or AMC…

Foolish takeaway

When it all boils down, meme stocks are extremely high-risk 'investments'. While they may seem like a joke to some, for those left holding the baby when the momentum swings the other way, it can all end in tears.

The stock market is often full of distractions. The potential 'get-rich-quick' investments are often seductive – but unless a company's fundamentals catch up with its share price, it can very easily all come tumbling down.

Lastly, many experts argue that building wealth via the stock market is best done by utilising the power of compounding. It may not be the most exciting way, but it's the easiest way to ensure the stock market doesn't make a meme of your finances.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended BlackBerry. The Motley Fool Australia has recommended BlackBerry. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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