What Is a Meme Stock?

Sometimes, it’s funny to do things just for the meme. But what does it mean when a stock is considered a meme stock? Here’s what you should know about meme stocks, including what they are, examples of them and why they’re so controversial: 

“Meme stocks are companies whose shares are extremely volatile because of the trading of online communities, such as Reddit,” says Robert Johnson, a professor of finance at Creighton University’s Heider College of Business. 

Meme stocks gain spotlight when a group starts buying a stock enmasse in an attempt to drive up the price. And, because of this bandwagon approach in places like r/WallStreetBets, they become a meme. It can be like seeing a bunch of other people buy something at a store, then without any research about the product, going up to the checkout counter and yelling “take my money!” (And, yes, there’s danger in that approach.)

“Meme stocks became popular when the Reddit mob tried to beat institutional hedge fund investors who had shorted the stock because of poor fundamentals,” adds Johnson. “Short sellers typically sell the stocks of firms with poor fundamentals—like earnings, cash flow and revenues.”

Meet the Expert

Besides his professorship, Johnson is also the CEO of Economic Index Associates, a New York-based firm. He is a Chartered Financial Analyst®, too.

GamesStop was the original meme stock. In January of 2021, a large group of Redditors decided to buy the stock, driving up its value from around $18 per share to about $380. So if you’d bought 10 shares at the original price, your $180 investment would have been worth $3,800 at the high. At the same time, hedge funds had bet on GameStop’s demise (by shorting the stock), so those hedge funds saw some pretty significant losses.[1]

“GameStop had a very significant short position and the Reddit mob believed that by driving the price of GameStop up by purchasing its shares, they could force the short sellers to capitulate and cover their shorts, further driving up the stock price,” says Johnson.

Since then, there have been other meme stocks including[2-3]:

• Bed Bath & Beyond

• AMC

• Koss Corp

But not all meme stocks have a happy ending for casual investors. With Bed Bath & Beyond, for example, Reddit users once again bet that the stock price would go up, this time because Ryan Cohen, an activist investor and the chairman of GameStop, had acquired nearly 10% of the company, says Johnson. But after Cohen sold his stake and the company announced that it would be selling an undisclosed number of shares and had plans for layoffs, the stock plunged. In fact, prices fell 21% in a single day.[4]

“The moral of the story here is that many retail investors confuse investing with speculation,” says Johnson. “And, while investing in the stock market is a positive sum game over the long run, speculating on meme stocks in the short run is a dangerous game.”

Done perfectly, meme stocks would balloon in price after you’ve purchased them, giving you amazing returns that beat the market. However, it’s really a matter of timing and luck—and, as any good investor knows, trying to time the market is never a good idea. Jumping on the meme stock train can result in losses, sometimes in a big way.

“The biggest criticism is that speculators aren't purchasing companies with strong fundamentals, but are buying stocks in which they believe a group of investors can drive the price action through unified action,” says Johnson. “The battle cry of the meme stock investor is ‘HODL,’ which means hold on for dear life. The meme stock investor believes that if the group stays unified, they can win.”

It’s an understandable impulse, and believing in the idea that rising tides lift all ships has some nobility attached to it. But done this way, it’s akin to gambling, says Johnson.

“The adrenaline rush that comes from the exaggerated volatility of many meme stocks is what drives some speculators to gamble in this fashion,” says Johnson. “But make no mistake, this is not investing, it’s speculation.”

That’s why he advises against investing in meme stocks for the average investor.

Meme stocks are still stocks: That means, like any other stocks, when you buy one, you’re essentially becoming a part owner of a company. But the primary difference comes from how people approach meme stocks versus other stocks.

Stock values are based on the market, which includes everything from company outlook, the wider market and past performance.[5] So typical stocks with strong fundamentals are less likely to take a massive hit due to public perception. But with meme stocks, people buy them because of speculation. The meme stock game is also a short-term one, whereas experts recommend taking a long-term approach to investing.

“​​The bottom line is that many investors are swayed by stories and ignore fundamentals,” says Johnson.