The very beginning of 2021 saw the rise of what industry experts are now calling “meme stocks.” Meme stocks are basically a crowdfunded pump of a lower market cap stock like Gamestop.
However, the rise of this phenomena goes much deeper than just a bunch of people on the internet trying to make some money. This article will cover everything you need to know about Gamestonk and the rise of meme stocks in 2021.
What Are Meme Stocks?
Basically, meme stocks are smallish market cap stocks that the Wall Street Bets subreddit has decided to purchase. These stocks are usually companies in so-called dying industries, biotech companies with a pharmaceutical pending FDA approval, or some sort of long shot company.
Meme stocks are also typically heavily shorted.
A meme stock would not be a stock based on a company like Amazon or Google. No one expects those companies to fail in the near term future, so it’s not a meme stock.
Examples of Meme Stocks
Some examples of meme stocks discussed on Wall Street Bets include the following:
- GameStop ($GME)
- Tesla ($TSLA)
- AMC ($AMC)
- Blackberry ($BB)
- Bed Bath & Beyond ($BBY)
How Meme Stocks Became Popular
First of all, meme stocks are not exactly a new phenomena. They have been around for close to a decade at this point.
Many people called Tesla a meme stock because the business did not appear profitable, had a lot of short interest, and the price still rose to extremely high levels.
However, meme stocks became a part of the mainstream consciousness during the short squeeze of GameStop. This short squeeze was launched on r/WallStreetBets and was the first retail driven short squeeze.
For those that don’t know, a short squeeze is when the price of a stock suddenly increases and short sellers are either margin called or have their position liquidated.
This brings us to GameStop. It all started way back in 2019 with a user called “DeepFuckingValue” (DFV) making a post on r/WallStreetBets that he had purchased $53,000 worth of $12 call options on GameStop. The options expired in 2 years.
He did this because he noticed that Gamestop was shorted with over 100% of the total shares outstanding. This means that people (institutions, really) could run into a scenario where they couldn’t rebuy the stock to close out their short position.
Now, DFV noticed this and saw the potential for Gamestop to become another Tesla situation – a heavily shorted stock that has a sudden increase in price. This increase in price causes the shorts to close out their position for a loss by purchasing the stock, which drives the price up even further.
To cut a long story very short, the short squeeze eventually happened in January 2021. The price of Gamestop rose from a measly $10.00 to a high of $325 in a few weeks.
Subsequently, the price fell to around $100 shortly after, but it has recently gone back over $200 as there are still more shorts to squeeze.
What Happened To The Shorts?
Simply put, the shorts lost a lot of money. The center of this Gamestop fiasco was a hedge fund called Melvin Capital. They had the most short positions on Gamestop.
They were down 49% in Q1 2021 and face about 10 lawsuits from investors into the hedge fund. There was also a Congressional hearing about Gamestop where DFV actually had to testify before Congress about the Gamestop short squeeze amidst potential market manipulation.
Furthermore, the popular trading app Robinhood faced some lawsuits because they did not allow users to buy or sell Gamestop during the most critical point in the short squeeze.
Making Money With Meme Stocks
Now, you might see a 33x increase in the price and think everyone involved in the Gamestop short squeeze made a lot of money.
That is only partly correct.
Sure, early investors made a lot of money on paper. But many on Wall Street Bets simply watched the price go up and watched the price go down. They had big paper gains, but not the best realized gains.
So, how do you make money with meme stocks?
You must sell the stocks to realize the gains. A company like Gamestop or AMC is not cryptocurrency. These are not very good long term plays.
Of course, 33x gains are not as good as 10x gains. But 10x gains are still good enough that it’s worth at least taking some profit.
Are Meme Stocks (Stonks) Here To Stay?
Yes, if money can be made with meme stocks, then they will continue to be popular. On that note, AMC has gone up 400% over the past week, so the future is looking bright for meme stocks.
An especially ripe target for meme stocks will likely be forgotten companies that are still publicly traded. Companies like BlackBerry, Bed Bath and Beyond, AMC, and Gamestop are prime examples of meme stock companies.
Meme Stock Lingo
Meme stocks have a fair amount of lingo associated with them. This is understandable as online communities tend to create their own lingo and memes. We will cover some of that lingo in this section.
Diamond hands refer to meme stock investors that will hold their stocks through severe downturns.
Paper hands refer to investors that will sell their stocks when the price goes down. The paper in this refers to the investors folding or breaking like a piece of paper.
Stonks is simply another way to say stocks on WallStreetBets. It’s a funny misspelling and is typically used in image memes.
Rockets, Mooning, or ‘To The Moon’
All of these refer to the stock rising in price.
Apes refer to WallStreetBets users that have invested in a stock. They are called apes because they will aggressively go into the stock.
Bears are simply investors that are pessimistic about the price. They typically hold a short position in the stock being discussed.
Melvin Capital, for instance, was a bear about Gamestop because of their large short position.
Tendies refers to chicken tenders. These are what WallStreetBets investors say they will jokingly buy with their earnings from the stock. Tendies can also be used as a replacement for dollars on WallStreetBets.
Finally, YOLO stands for You Only Live Once. Basically, this is an investor posting a screenshot of the
That about sums it up for Gamestonk and the rise of meme stocks. These stocks are here to stay. They will be a small subset of the market, but will attract both retail investors and institutional investors looking to make some money.
If you want to check out the latest news on meme stocks, then we recommend visiting r/WallStreetBets.