Meme stocks have become a hot topic in recent years, as retail traders defy expectations and send select companies’ share prices “to the moon.” This guide will provide an overview of meme stock trading, including a definition of the term, examples of popular stocks, and tips for trading these assets. Our experts have also compiled a list of the top meme stock brokers in 2023.
What Are Meme Stocks?
Meme stocks refer to assets, usually stocks of well-known companies, that become popular among retail traders on social media and outperform expectations, potentially earning early investors a fortune.
Market movements are typically influenced by large institutions, such as banks, funds, and similar bodies with enough capital to make or break a company. Their actions are carefully observed by countless analysts and investors, and they have the contacts, expertise, and resources to enter and exit positions at optimal times, giving them a significant advantage over retail traders.
However, the rise of meme stock trading has bucked this trend.
GameStop – The Original Meme Stock
In 2020, meme stock traders on online forums and blogs, including Reddit’s r/WallStreetBets subreddit, identified undervalued companies such as the video game outlet GameStop that large institutional money had bet against.
The market typically follows the bets made by these large firms, but in this case, retail traders rushed to buy and held on for dear life, keeping GME’s stock buoyant.
In January 2021, this led to a ‘short squeeze’ in which big firms such as Melvin Capital were forced to buy shares at market price to cover their short positions. This propelled the price even higher – GME’s price soared 1,500% to $347.51 per share in the two weeks up to January 27.
The GME short squeeze was one of the runaway market stories of the year, but retail traders managed to have similar success with some other meme stocks, including AMC Entertainment Holdings, which flew 300% to a peak of $20.36 in January 2021 after WallStreetBets traders declared their interest. Other successful meme stocks of the period include BlackBerry Limited (BB), Tootsie Roll Industries Inc. (TR), and Build-A-Bear Workshop (BBW).
How Do Meme Stocks Work?
The question of how exactly meme stock trading works is quite complex, as it depends on psychology, social dynamics, and other variables. At the outset, GME was a stock that several well-informed retail traders viewed as being a good investment opportunity. This was not a mindless bandwagon – some of the early WallStreetBets investors such as Keith Gill (AKA DeepFuckingValue) had been investing in GME since 2019 and shared posts with extensive analysis of their reasoning, backed up by fundamental analysis. But there are many undervalued companies out there and thousands of retail traders with the skills to identify them.
Perhaps GME’s takeoff can be attributed to various other essential factors besides the analysis conducted by Gill and his comrades.
One of the things that sparked mass interest was the brand recognition of GME. Many retail traders who invested their money in the stock had fond memories of visiting GameStop as children, which contributed to the memes and social media posts that became ubiquitous as the stock soared. It was exciting to read about enthusiastic amateurs getting rich from ‘stonks’ unlike most financial news. The humor in the GME memes was relatable, helping the message circulate widely and generating even more interest.
Celebrities took note of the short squeeze situation, and as GME flew to record highs, they further spread the story. On January 26, Tesla CEO Elon Musk tweeted ‘Gamestonk!!’, a day before the meme stock reached its record high. The following day also saw the biggest 1-day rise in GME price, a massive 134% increase.
Finally, other variables created the conditions for GME’s stratospheric rise. The US government made payments to all households to support citizens during the Covid-19 pandemic, and many people who were stuck at home with extra disposable cash decided to try trading stocks for the first time. This meant a significant injection of retail cash into the stock market, providing the necessary capital to counter downward pressure from institutional shorts.
In other words, there are at least three key factors to consider while looking for potential meme stocks:
- Strong fundamentals – companies that have the potential to perform well are more likely to take off as meme stocks
- Brand recognition – if the stock is not a household name, it is less likely to get people’s attention on social media
- Favorable market conditions – retail traders should have disposable cash and some appetite for risk
How To Pick Meme Stocks
Traders who hope to capitalize on the next wave of meme stocks need to keep their eyes peeled for shares in companies that are undervalued and have strong fundamentals.
But what sets meme stocks apart from other trading is that you also need to be completely tuned in to social media if you hope to get in early.
Some of the most important sources of information on potential meme stocks include:
- Reddit, especially subreddits like r/wallstreetbets, r/stocks, r/investing and r/bulltrader.
- Discord is a chat app that has countless servers for trading, including many that will share information on potential meme stocks.
- Telegram allows meme stocks traders to communicate instantly through a global messaging service.
- Twitter is one of the world’s largest social networks and a great way to track new trends.
- TikTok is one of the newest social media apps to gain prominence and is extremely popular among younger demographics. It has also been a major channel for content related to meme stocks and cryptocurrencies.
5 Key Meme Stocks
The range of meme stocks with the potential to take off this year is broad, but here are a few of the hot meme stocks today:
- Bed Bath & Beyond – The home merchandise store was a surprise hit in January 2023 as retail traders bet that it would experience a post-covid bounce-back from years of underperformance.
- Blackberry – Once a leading producer of business-focused cellular devices, Blackberry has switched to security software since smartphones took over.
- However, the company still has a loyal following, boosting its credentials as a potentially lucrative meme stock.
- Palantir Technologies – Funded by PayPal co-founder and billionaire Peter Thiel, this company may not be a household name in the same way as GME or Nokia, but it has built a strong reputation as a data analytics company and is tipped as a contender by many meme-stock traders.
- Nokia – Another former frontrunner in the mobile phone sector, the Finnish company is tipped by some in the meme stock trading sphere to be on the way to reclaiming its throne.
- AMC – One of the best-performing companies from the first wave of meme stocks still has a large base of loyal retail backers and performed well in early 2023.
A term that originated in the cryptocurrency world, traders who hold their stock through periods of high volatility and despite warning signs are sometimes known as ‘hodlers’, or ‘diamond hands’.
The idea is to hang onto the stock, regardless of ups and downs, until it reaches its potential in a frenzy of meme stock trading like GME in January 2021.
Going short on a stock involves borrowing a security whose price you expect to fall and selling it now.Traders who go short aim to purchase the asset at a lower price later and pocket the difference.
If the trader’s prediction is incorrect and the asset’s price rises, they will need to pay the difference.
A ‘short squeeze’ generally occurs when a large number of short positions are open on a stock whose price experiences a sudden, sharp rise, forcing traders and firms to close their short positions.
The influx of new buy orders from short sellers adds even more buying pressure onto the stock, and can send its price even higher. Before GME’s legendary run in 2021, about 140% of the company’s public stock had been shorted, leading to a massive amount of buying pressure from the short squeeze that sent the share price skyrocketing.
Traders looking for a potential short squeeze opportunity on a meme stock should look out for data on the number of shorted stocks. Do this by visiting the exchange where the stock is traded and reading their regular numbers reports. Alternatively, look out for Yahoo! Finance’s regular reports on the most shorted stocks, or you can search the site for a specific company and check for short interest on the statistics tab.
Spot Downward Trends
Nothing lasts forever, and meme stocks are prone to particularly sharp drops when the bubble bursts and the trading craze ends. If you miss a meme stock on the way up, you could try shorting the same stock once it looks overvalued.
This is a risky strategy as it is difficult to tell how long a buying frenzy will continue, but many traders look for ‘top signals’ – signs that the hype has reached its zenith, tons of retail money is coming in, and the big early investors are ready to take their profits.
- Don’t get emotional – It’s easy to get caught up in the excitement of trading meme stocks, but this can lead to buying when the price is at a peak or holding for too long and missing your chance to profit.
- Be selective – There are a ton of meme stocks around and even more traders singing their praises, but only a few of them will take off.
It’s best to be picky and only stake your money on the ones that tick all the boxes. Check the market cap and retail interest in the stock, as well as the amount of short interest and the company’s fundamentals.
- Manage risk with a balanced portfolio – Meme stocks are generally a high-risk investment, as they often involve betting against big institutional money and gambling on a social media wave to take off. It’s wise to balance out your investment in meme stocks with a portfolio of less risky investments.
- Take profits – Despite the strategy (and the strong peer pressure to hold) described above, traders need to know when to take profits – otherwise they’ll watch their potential earnings evaporate when the meme stock excitement dies down.
- Adjust your strategy – Meme stocks aren’t born in a day, and you might need to hold onto them longer and through more volatility than you normally would. Day trading meme stocks, for example, may not be viable as you may need to hang onto the asset for a long time while you wait for it to turn a profit.
- Use leverage wisely – If you’re confident that a meme stock has the necessary momentum to make big gains, leverage can greatly increase your profits from a small position. Leveraged trades will also magnify losses, so use this tool with care.
Pros Of Meme Stock Trading
- Retail investors can make use of a simple trading strategy
- Once a meme stock takes off, the momentum can make it unstoppable
- Chance to make stratospheric profits from meme stock market events today
- The meme stock trade is far from over with the increasing popularity of social media
- Trading meme stocks can be fun, fostering a community feeling among retail investors
Cons Of Meme Stock Trading
- Meme stock trading is risky as you are often betting against big institutional investors.
- Frenzied trading in meme stocks is often a warning sign that retail traders fail to react to
- It’s difficult to accurately predict an investment that will take off as a meme stock in the future, and if you come in late you risk buying at the top before a crash
- Meme stock trading exploded in recent years under a specific set of circumstances that will not often be matched
How To Start Trading Meme Stocks
- Most meme stocks are established companies, so you should find a broker with access to major exchanges like the NASDAQ or NYSE (New York Stock Exchange)
- Derivatives like CFDs, options and spread betting can be used for trading meme stocks as they allow you to make leveraged trades without having to own the underlying asset
- Check TradingView and other sites to track the price history of potential meme stocks
- Keep an eye on the most shorted companies by following exchange data or searching for stock analysis on Yahoo!Finance
- Dive into social media sites to chat with others and share views on the latest meme stocks and other trading topics
Getting Started With A Broker
If you want to trade meme stocks, you should find reputable brokers with low fees and access to stocks on major exchanges.
The broker you choose will depend on your level of experience, the stocks you wish to trade, and many other factors including your country of residence.
It is a good move to choose meme stock brokers with a range of vehicles as this offers the flexibility to try different styles and strategies and to make money in varied market conditions.
Many traders prefer contracts for difference (CFDs) and similar derivative products that allow you to speculate on price movements without buying the underlying asset.
Another advantage of these derivatives is the availability of leverage, which can greatly increase your trading power and maximize the profit you make trading meme stocks and other assets.
Meme Stocks Vs Cryptos
Trading meme stocks and cryptocurrency can bear a resemblance as both tend to ride waves of public interest to sharp price increases. Some of the most famous examples include the so-called ‘meme coins’ – Dogecoin and Shiba Inu, for example – which saw social media fervour and rounds of funny memes translate into jaw-dropping price increases.
One major difference between meme stocks and meme coins is that the stocks tend to be in companies that have already earned their place as household names. Price increases for meme coins, on the other hand, are usually tied much more closely to social media hype.
Bottom Line On Trading Meme Stocks
Meme stocks were one of the rare stories in trading history where retail traders got the better of big institutional money, and it’s no wonder that many dream of repeating that success. The power of social media makes that a possibility, as long as the market conditions are right and the company has a strong following. Traders should take care not to get swept up in emotion while trading meme-stocks, and take profits often to avoid missing golden opportunities.
Use our ranking of the best meme stock brokers to get started.
What Is The Meaning Of Meme Stocks?
Stocks that become popular and experience big price increases due to the power of social media are known as meme stocks.
Often these stocks gain huge levels of support through humorous memes on Twitter, Reddit and other social media sites. They also tend to be from companies that are seen as undervalued, especially those which have a high amount of short interest.
Many people who are tuned into social media and enjoy following the latest trends take part in meme stock trading, and some have seen incredible returns by picking a meme stock before it takes off.
Is Meme Stock Trading Finished?
After meme stocks flew to public prominence in early 2021, they fell precipitously from their all-time highs later that year. But meme stocks are far from over, and Bed Bath & Beyond and some other popular meme stocks experienced significant rallies in early 2023, for instance.
How Do You Trade Meme Stocks?
Traders who want a piece of meme stock action will need to find a good broker that offers access to major exchanges such as the NASDAQ and NYSE.
Is Trading Meme Stocks Legit?
There may have been some news headlines about market manipulation during GME’s epic rally in 2021, but meme stocks are a legitimate asset to trade. These are stocks of big, publicly traded companies on some of the world’s largest exchanges, and there is nothing wrong with discussing stocks and investments on public forums.
What Does A Meme In Stock Trading Mean?
Memes are images, pieces of text, videos or other content that spread rapidly and take hold of the public consciousness, typically through social media.