Magazine

Explainer: What’s Happening With Meme Stocks

By Sylvia Kwan

For the majority of investors (like you, we hope!), investing involves a diversified portfolio of stocks, bonds, and maybe some alternatives, too. But the finance industry has about a million ways to make money on money that get way more complex than that (and much riskier, too). See: GameStop. Most recently, there’s been a lot of talk about “meme stocks.” (Here, here, and here.) And yet there’s not a ton out there about what they are and why they’re getting so much attention. So here’s a quick, non-jargony explainer on meme stocks, and how exactly Reddit (and one large popcorn) are involved

What are meme stocks?

The word “meme” doesn’t refer to a funny image with text on it (although that’s probably the most common usage). By definition, a “meme” is anything with cultural significance that spreads virally.

So “meme stocks” are stocks that:

  • Have prices that have gone up significantly

  • Have lots of social media attention, particularly on Reddit’s “WallStreetBets” forum

  • Are favorites of small or individual stock traders who loosely organize, virtually, and use their aggregate financial power to drive up prices

  • Have a lot of trading activity

  • May be heavily shorted, meaning large institutional investors have sold the stock in the belief that it will decline in the future

Typically, investors buy a stock because they believe that the value of that stock will rise in the future, based on things like increased sales, more customers, higher profit margins, bigger market share, and expansion of their products and services. All those things contribute to a company’s earnings, and are often called a company’s fundamentals (aka all the information that contributes to how a company makes money).

Meme stocks, on the other hand, have prices that are significantly higher than what professional investors and analysts believe are supported by the company’s fundamentals. That means that buyers are buying for reasons that have little to do with the company’s earnings. They may be buying for the thrill, or because of FOMO, or to make a statement against those who have negative views of the stock.

Can you make money on meme stocks?

Sure, you can make money trading meme stocks, but only if you somehow get the timing right. If you manage to buy low and sell high, you can make money; if you guess wrong, buying too high and selling low, you’ll lose money.

No one can accurately predict the direction of the markets in general, and predicting where meme stocks will go is even harder. That’s because they’re bought and sold by traders who are mostly betting on the behavior of others, not on the company’s future prospects. And you can’t predict human behavior — so whether or not you make money buying and selling meme stocks will just be a matter of luck. Lots of luck. So, treat it like you’re sitting down at the blackjack table.

So, what’s up with AMC?

Shares of meme stock AMC (yep, the movie theater chain) started the year at $2, rose to $20 in January 2021, and settled around $10 a share — until recently, when it reached an all-time high of $62.55 on June 3, 2021. Since then, it’s bounced around a bit, averaging around $50.

For context: At the end of 2019, with theaters full of movie lovers munching on popcorn and skittles, AMC was valued at $5.8 billion. Today, even though theaters are nearly empty, AMC at $50 a share is valued at nearly $25 billion. Analysts and investors are hard pressed to come up with a scenario of how AMC can be worth four times its pre-pandemic value.

But that’s exactly the point. Many people buying AMC stock are not buying because they believe AMC is worth $25 billion. They’re buying to make a statement against those who have sold AMC short, and those who believe AMC will fail. It’s kind of like voting for a political candidate not because you agree with their views, but because you dislike the opposing candidate (except this time, by risking your money).

Regardless of the how and why, AMC’s leadership took advantage of its elevated stock price to raise money by selling shares in a stock offering. They sold 11.5 million shares at an average price of $50.85 per share, raising $587 million, which will help strengthen AMC’s finances as it works to get back to profitability.

While AMC’s leadership has cautioned those buying their stock that they should be willing to risk losing all or a substantial portion of their investment, there’s a small mollification: AMC is giving all of its shareholders one free large popcorn. Yeah. So, doing the math, if you bought one share for $50, your free large popcorn that costs about $10 at the theater will net you a ‘return’ of 20%. Not bad.

But actually going to see a movie at a theater? Priceless.

Should I buy meme stocks?

Buying and selling meme stocks is for traders — people who buy and sell stocks over short time periods, like days or weeks or even months in an effort to earn a quick profit. To be successful, traders need to accurately predict and time their buys and sells —a bit of luck that very very few people have. So we don’t recommend you buy them with any money you can’t afford to lose.

Long-term investors, on the other hand, know the power of a diversified portfolio. They seek profits by buying and holding investments and giving them the opportunity to grow over time. And that’s what Ellevest is built to help you do.


Disclosures

© 2021 Ellevest, Inc. All Rights Reserved.

The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person.

All opinions and views expressed by Ellevest are current as of the date of this writing, for informational purposes only, and do not constitute or imply an endorsement of any third party’s products or services.

Information was obtained from third-party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. Investing entails risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.

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Sylvia Kwan

Dr. Sylvia Kwan is the Chief Investment Officer of Ellevest. She researches and oversees Ellevest portfolios and develops the algorithms behind Ellevest’s investment recommendations.