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What are meme stocks and why are they back?

Meme’s stock mania, born during the height of the coronavirus pandemic, has turned the tables on institutional investors by bringing daily retail traders together via social media to pump up corporate stocks on Wall Street.

This new generation of traders, who congregate on websites like Reddit’s popular WallStreetBets forum and use commission-free trading apps like Robinhood, made headlines after they jumped from GameStop’s stock price for struggling video game sales.

The shares rose from $3 in 2020 to $300 at the end of January 2021, causing historic market volatility and huge losses for short selling hedge funds.

Jamie Rogozinski, founder of the online stock market chat forum WallStreetBets, which has 12.5 million members on Reddit, told Al Jazeera that retailers were reacting to the times. The government forced everyone home, sent them stimulus checks, took away people’s entertainment, their sports, everything. The natural progression was for people to turn to stocks and trading.”

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Edward Moya, chief market analyst at OANDA, explained that retail investors who have been involved in the meme-equity frenzy have been known to target distressed companies, and there is good reason for that.

“The retailer was trying to find opportunities to stick it in hedge funds,” he told Al Jazeera.

What is an arrow meme?

The meme stock is one of the stocks that became popular among individual investors thanks to social media.

A group of day traders on a social media site like WallStreetBets identify stocks and coordinate with others within their online community to buy stocks to inflate their price with the goal of selling them before they drop. They usually target companies that Wall Street has bet on. A rise in the stock price usually has little to do with the company’s performance.

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AMC Theater is filmed amid the coronavirus disease (COVID-19) pandemic in the Manhattan borough of New York City, New York, United States
Filmed at the AMC Theater in the Manhattan borough of New York City, New York, United States, the series became a meme stock in 2021 and used the capital to rebuild its business [File: Carlo Allegri/Reuters]

When did meme stocks become a thing?

The meme-share frenzy made headlines in January 2021 with video game company GameStop. Day traders regulating on Reddit caused stocks to surge. Traders gained a lot of attention because they caused institutional investors on Wall Street, and many short selling hedge funds, to lose millions of dollars.

What is short selling?

Short selling is the borrowing of a stock through a broker with the expectation that the price will fall. When it does, the buyer gives it back and takes advantage of the difference between the first price and the second lower price.

What is a short squeeze?

Short squeeze is when investors who have bet on a stock assuming it will go down, see the price go up. So when Reddit’s WallStreetBets ask day traders to buy GameStop shares, thereby driving the price higher, hedge funds found in short squeezes can either close their bets and undo their losses or try to outpace the higher price which usually means they have to put up more Money.

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Reddit logo appears on a smartphone in front of the displayed Wall Street Bets logo
WallStreetBets is a popular forum on Reddit where users gather to discuss stocks [File: Dado Ruvic/Reuters]

How do mid-market traders choose which companies to target?

Rogozinski of WallStreetBets explains strategy: “They have a competitor, big bad hedge funds that are short selling and trying to get rid of their loved ones, in the case of GameStop it was the video game company, something that this demographic is associated with. [to]. So you have this wonderful story about good and evil. David and Goliath. This video game store, I love it, I grew up playing Mario Brothers and wouldn’t let you take it away.”

Has Wall Street benefited from the meme stock hustle?

yes. Analysts say Wall Street is making a profit even if it takes the initial stock frenzy to get used to.

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“In some cases, money was easy,” explained OANDA’s Moya. “When Mimi’s stock started developing, you had all the hedge funds saying, ‘Well, I don’t believe in this strategy, there’s a lot of opportunity here to cash in on the entry, maybe not necessarily ahead of the retailers, but getting ahead of them. This is where the money is.”

Has meme circulation evolved in the past year and a half?

With high inflation and a possible recession on the horizon, retailers are changing their behavior, Moya told Al Jazeera.

“They’re kind of trying to be a more pump-and-dump scheme,” he said. “It wasn’t what we’ve seen before where people were saying they were going to keep GameStop forever or AMC forever. Now it’s more of a targeted strategic bet.”

Reddit wallstreetbets meme
The meme was found on Reddit’s WallStreetBets, where 12.5 million users connect with humorous references to popular culture that prompt day traders to buy shares of certain companies. [Al Jazeera]

Do people actually earn from meme shares?

As with any investment, it depends on the timing of what you bought and sold. Some individual investors have made significant gains at GameStop, while those who own it now will operate at a loss.

“If you were to randomly pick someone who held a position at GameStop at the height of the frenzy, it’s not clear that person made money over the course of the GameStop episode. A lot of people have been keeping stock in terms of Baruch College finances,” Alex Chinko, a professor of finance at Baruch College, told Al Jazeera. The principle is much longer than it should.

Why is the meme stock re-emerging now?

Oanda’s Moya explained to Al Jazeera that rampant inflation has made everyone poorer.

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Millennials and Generation Z are buying homes, they have tons of student loans to pay off, and they can’t afford to lose their financial investment. But by the same token, retailing around meme stocks offers an opportunity to beat the tide. “With so much pessimism around Wall Street, not many young people expect the stock market to offer many opportunities for long-term bullish bets,” Moya added.

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“There is a do-it-yourself influencer mentality on social media, and it’s also about the gig economy, where people work and still do side hustle. You have these people saying, ‘I don’t need to pay someone else to control my money,’” Rogozinsky added.

A customer walks into a Bed Bath & Beyond store in Novi, Michigan, United States
A customer walks into a Bed Bath & Beyond store in Novi, Michigan, US – The company is one of several that has seen its stock rise driven by the support of individual investors coordinating online [File: Emily Elconin/Reuters]

Have Mimi’s shares affected the broader market?

It looks like Wall Street might cater to this new crowd.

“The New York Stock Exchange and global market companies are starting to create cheaper and smaller derivatives and products,” Rogozinsky said. “They make small copies of futures contracts, small stock options, and they are a tenth of the leverage, so they are not dangerous. There is really no financial justification for having these products, other than to make things more affordable for this particular demographic.”

Is there anyone who regulates this stuff?

The Securities and Exchange Commission (SEC), the US federal regulatory agency, has considered the meme shares and Congress has held a hearing on them, but so far no action has been taken on them.

In June 2022, the US House of Representatives Financial Services Committee published its findings in a report (PDF), warning of inadequate risk management that led to the meme-stock trading frenzy. The commission also called on regulators to strengthen capital and liquidity oversight, improve supervision of the “big intermediaries” facing retail and try to better understand how retailers operate.

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