If you’re familiar with the GameStop case, you know that not all meme stocks end with a happy note. But what does the future hold for these types of stocks? Let’s examine the market outlook and how things have changed since then.
What are meme stocks?
To begin with, let’s examine the context. “Meme stocks” are shares in companies that gain popularity among retail investors due to online discussions, frequently driven by memes and social media. These stocks are known for their extreme volatility and significant price movements, which can be disproportionate to the financial fundamentals of the underlying company.
It’s important to understand that the term “meme stock” is not just about online popularity. Many of these stocks are characterized by market dynamics driven more by emotions and speculation than by sound financial foundations. Investors in meme stocks should be aware of the heightened risks associated with these stocks and understand that prices can be highly volatile and unpredictable.
Understanding the GameStop case: A closer look
The GameStop case was a remarkable financial event that occurred in January 2021. It showcased the impact of retail investors on stock market dynamics. The story began with a group of individual investors, mainly from the online forum Reddit, known as WallStreetBets. The group coordinated efforts to drive up the share price of GameStop (GME), a video game retail company facing financial difficulties.
Meanwhile, large hedge funds were betting heavily against the company’s shares, using a strategy known as “short selling.” This strategy involves investors betting on the price of a share falling, profiting from the difference between the high selling price and the lower buying price when they repurchase the borrowed shares.
Against this backdrop, retail investors decided to take action, buying up GameStop shares and driving up the price. Online messages and memes on Reddit galvanized an online community around the idea of challenging big investors and hedge funds.
The significant increase in GameStop’s share price caught many institutional investors off guard, resulting in substantial losses for those who had bet against the company. This move also sparked intense debates about the financial market’s nature, regulation, and retail investors’ power when they act together.
Trading platforms such as Robinhood temporarily restricted the purchase of GameStop shares and shares of other companies involved in the phenomenon, citing extreme volatility. This generated additional controversy and suspicion that the financial system was protecting institutional investors’ interests at the expense of retail investors.
The GameStop case had a profound impact, highlighting the growing influence of retail investors in global finance. It also sparked debates about transparency, market regulation, and the balance of power between different stock market participants.
What to expect from Meme Stock in 2024
After the market experienced the risks of meme stocks in 2021, many believed that this trend wouldn’t continue. However, according to Bloomberg, we saw new growth in meme stocks during the second half of 2023, driven by the Solactive Roundhill Meme Stock index. Even though the craze of 2021 has passed, meme stocks still pop up from time to time.
In 2024, we can expect occasional bursts of meme-like activity from multiple meme stocks. For instance, GameStop saw meme-like recovery ahead of its Q3 earnings in early 2024, and other businesses have seen meme-like periods of upheaval.
Meme stock expert Tom Bruni suggests looking for devastated market areas that already have a strong retail investor community around them. In the electric vehicle segment, solar stock, or anything China-related, traders will look for stocks at the intersection of these themes that could be potential “powder kegs” for volatility in 2024. For instance, Lucid Group ($LCID) is a stock that could be considered.
One thing is certain: the social media dynamic that created the meme stocks phenomenon is here to stay. “Internet culture will continue to prevail in the markets,” said Tommy Tranfo, head of the meme stock community Stocktwits. “The crypto markets are one area where we expect to see a large concentration of this activity, particularly in the context of a crypto bull market, which is likely to bring in a new wave of market participants who will lean towards demonstrating Internet culture.”
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