What started the meme stock movement?
The meme stock movement unofficially started in the summer of 2020, when most people were stuck at home during the first few months of the pandemic. Looking to turn some of that extra free time into money, many people turned to the stock market and social media for ideas.
Video game retailer GameStop is recognized as the first meme stock. RoaringKitty (aka, Keith Gill) started sharing his views about GameStop stock on Twitter, YouTube, and Reddit's r/wallstreetbets in 2019, explaining why a combination of high short interest from short-sellers (firms that bet against a company) and an undervalued and underappreciated GameStop business could lead to huge gains. Add in a pandemic, a surge in new investors who grew up online, and the ease of stock trading on new apps such as Robinhood Markets (HOOD -0.23%), and all the right ingredients came together to create a viral meme stock movement.
Pros of meme stocks
Because a surge in buying activity can send a stock price soaring, there are some benefits to owning meme stocks (and potential meme stocks before they rocket higher).
- A chance for very high returns in a short period.
- An ownership stake in a new investment idea before the rest of the market gets wind of it.
- A young generation raised on social media has decades of prime investing ahead, so the meme stock movement could be here to stay.
Cons of meme stocks
As with other highly volatile investments (such as the related cryptocurrencies movement), there are drawbacks to betting on meme stocks.
- As with other moments of viral skyrocketing stock prices, the meme stock trend may not last forever -- especially as some traders return to work and spend more time away from home.
- Short-term stock prices are driven by supply and demand, so price moves are unpredictable and can lead to quick losses.
- Some meme stocks don't trade on any fundamentals, and returns can suddenly reverse course, causing the company to lose its luster among individual investors.
How to identify a good long-term meme stock
If you're an investor looking for a longer-term holding (think years rather than days, weeks, or months), there are some important factors to consider before buying a meme stock. Some business fundamentals and economic trends can go a long way toward balancing out what can be fleeting social media trends or hopes of a short-term short squeeze.
- A company with great fundamentals such as stable or growing revenue, healthy profit margins, and a solid balance sheet (i.e., more cash and equivalents than debt).
- Great fundamentals aren't required, but if a business is struggling, an actionable plan to improve its financial results over time can do a lot to help sustain stock price growth.
- If a company has suddenly reached meme stock status and management has yet to comment on what it will do with its newfound strength, look for a business that can benefit from strong secular growth trends (such as technology).
