Meme Stocks Explained

If you’ve read about the stock market lately, you’ve probably heard at least a passing reference to meme stocks. It seems like every financial website has a meme stocks list, and serious figures in the finance industry are talking about them. So, what are meme stocks, and what do they mean for investors?

A meme stock, broadly speaking, is a stock that becomes popular due to social media. GameStop and AMC are good examples. Retail investors, mostly on Reddit, all decided to buy the stocks at once. This pushed their value higher not because the company had gained any inherent value, but because demand for the stocks had soared.

What does this mean for investors? To answer that question, we’ve pulled data from a recent study by The Harris Poll. The most surprising finding was that over 25% of US investors had bought a stock based on social media. Here’s everything else you need to know.

Meme Stocks – By the Numbers

Let’s start out with the basics. Here are the quick and dirty numbers about meme stocks, as taken from the Harris poll:

  • 40% of 18-44-year-old men had invested in meme stocks, compared to 16% of women and 17% of investors aged 45 and up.
  • More than half of meme stock investors invest less than $250. Only 15% invest $1,000 or more.
  • 56% of people who bought meme stocks sold the same month, and 34% sold the next month.
  • 35% of traders found stocks on Twitter, Facebook, and other social media. 32% found stocks on forums like Reddit. Only 20%  of traders bought a meme stock on the advice of a qualified financial adviser.
  • Only 36% of Americans have actually studied how the stock market works.
  • Not all meme stock traders are in it for the money. Many are simply investing small amounts of money for entertainment, the same way some people go to a casino.

It’s All About the Apps

Meme stocks are primarily popular with retail traders using app such as Robinhood.

So, we know a bit about meme stocks. But why are people flocking to this kind of stock? The answer is in the apps. With trading apps like Robinhood, younger investors see trading as a normal part of their digital lives.

Think about the growth of online banking. 15 years ago, most people would have been leery of doing their banking on their smartphone. Nowadays, people can go for years without ever setting foot in a physical bank branch. This is particularly true for younger people, who have never known anything else. In fact, 71% of 18-19-year-olds do their banking online. For these younger investors, an app-based trading platform is a natural extension of that kind of app-based thinking.

Meme Stocks – A Murky Environment

Unfortunately, it can be hard to get good information about meme stocks. With traditional sources of information, you know what you’re getting. But with a meme stock, you’re sometimes getting information from a stranger on the internet. How do you know if the investment is worthwhile?

To put it succinctly, you don’t. When you invest based on anonymous internet posts, you run the risk for falling victim to a scam. Remember, the meme stocks that make the news are the ones that have performed well. But there are even more meme stocks that fail to perform as expected.

Then again, every investment carries some elements of risk. In that sense, meme stocks are no different – as long as you’re willing to assume that risk.

Is This a Repeat of the ‘90s?

Back in the 1990s, we got our first taste of independent online trading. These were the early days of the internet, when Raging Bull and other message boards allowed people to connect and talk about stocks. The result was wild in both the good and the bad sense. On the one hand, people had more information at their fingertips than ever before. On the other hand, these same online forums were rife with misinformation.

That said, there are some differences between today and the 90s. For one thing, many 90s investors were overenthusiastic about the .com market, which isn’t a concern today. For another thing, modern internet users are more savvy about the kind of information they trust online.

A Perfect Storm For Meme Investors

Right now, we’re experience a confluence of circumstances that create a perfect environment for meme investors. We have a younger generation of investors who are used to communicating on social media. We also have a bunch of trading apps that make trading stocks as easy as ordering a pizza. Under these conditions, it’s no surprise that meme stocks have become a phenomenon.