“You have likely heard of meme stocks this yr. and young traders making millions on companies that are on the verge of bankruptcy. true, it is not a joke”— Paul Ebeling
The phenom of meme stocks is so new that there is no official definition yet.
Let’s try this 1: A meme stock is any stock that’s seen huge trading volume from retail investors who have targeted it on social media. Or, the stock has “gone viral” on social media and has seen its price rocket to the moon as a result. And investors should brace for a permanent change to the way stock markets function.
By my definition, Dogecoin, the cryptocurrency that was launched as a parody is a meme stock. But, some meme stocks have an important differentiator: they are ripe for a short squeeze.
Meaning: A short squeeze is when a short-seller is squeezed out of their position by excessive price action. A group of retail investors on social media can target a company with tremendous short interest and push it “to the moon” by forcing these short-sellers to close their positions.
This is what’s happening right now to AMC stock. The company has seen its value surge by 2,800% YTD.
Then there is BlackBerry. BlackBerry has seen excessive short selling over the past yr, which is why retail investors on Reddit targeted it. Last year, the stock jumped 280% between April and December 2020. This month, it’s up 83% again as Reddit rediscovers it.
And this, the subreddit retail investor action exploded early last wk when there came to be lots of touting of GameStop’s stock by several of its members sent the video game retailer’s shares soaring more than 400% 2 wks ago. The actions helped fuel a short squeeze in GameStop (NYSE:GME) stock, where investors who had used options to bet against the stock needed to cover those bets by buying shares.
The rise of meme stocks is the most fascinating aspect of the market in Y 2021. For most investors, this phenom has no impact. But, if you are on the short side you can get hammered.
Have a positive weekend, Keep the Faith!