The meme stock mania, born at the height of the coronavirus pandemic, has turned the tables on institutional investors by banding together retail day traders via social media to pump stock from companies that Wall Street is betting against.
This new generation of traders, congregating on websites like the popular Reddit WallStreetBets forum and using commission-free trading apps like Robinhood, made headlines after catapulting video game retailer GameStop’s stock price.
Shares have fallen from $3 in 2020 to $300 at the end of January 2021, leading to historic market volatility and substantial losses for short-selling hedge funds.
Jamie Rogozinski, the founder of popular online stock chat forum WallStreetBets, which has 12.5 million members on Reddit, told Al Jazeera that retail traders were simply reacting at the time. “The government forced everyone to go home, sent them stimulus checks, deprived people of their entertainment, their sports, everything. The natural progression was for people to move into stocks and trading.
Retail investors who have gone on the meme stock frenzy have been known to target struggling companies, and there’s a good reason for that, explained Edward Moya, principal market analyst at OANDA.
“The retail trader tried to find opportunities to stick it to hedge funds,” he told Al Jazeera.
What is a meme store?
A meme stock is a stock that becomes well known to individual investors through social media.
A group of day traders on a social media site such as WallStreetBets identify the stock and coordinate with others within their online community to buy stock in order to inflate its price with the intention of selling it before he does not fall. They typically target companies that Wall Street has bet against. Rising stock prices generally have little to do with company performance.
When did meme stocks become a thing?
The meme action frenzy made headlines in January 2021 with video game company GameStop. Day traders organizing on Reddit drove the stock higher. The traders have attracted a lot of attention because they have caused institutional investors on Wall Street to lose millions of dollars, with many hedge funds selling short.
What is short selling?
Short selling involves borrowing a stock through a broker in the hope that the price will fall. When it does, the buyer returns it and benefits from the difference between the first price and the lower second price.
What is a short press?
A short squeeze occurs when investors who have bet against a stock assuming it will go down see the price rise. So when Reddit’s WallStreetBets asks retail day traders to buy GameStop stock, thereby driving up the price, hedge funds caught in a short squeeze can either close their bets and absorb their losses or try to ride out the surge. price, which usually means they have to put in more money.
How do even stock traders choose the companies they target?
Rogozinski of WallStreetBets explains the strategy: “They have a rival, the big bad hedge funds that sell short and try to get rid of their beloved, in GameStop’s case it was a video game company, something that this demographic concerns [to]. So you have this very beautiful story of good and evil. David and Goliath. This video game store, I love it, I grew up playing Mario Brothers and I’m not going to let you take it away.
Did Wall Street benefit from the stock market buzz of memes?
Yes. Analysts say Wall Street is making a profit even though the initial meme stock frenzy took a little getting used to.
“In some cases, it was easy money,” explained Moya of OANDA. “When the meme stocks started moving, all the hedge funds said, ‘OK, I don’t believe in this strategy, there’s so many opportunities here to take advantage of the entry, maybe not necessarily before retail traders, but get ahead of them. That’s where the money is.
Has the same trading evolved over the past year and a half?
With record inflation and a possible recession on the horizon, traders are changing their behavior, Moya told Al Jazeera.
“They’re really trying to become more of a pump and dump system,” he said. “It’s not what we’ve seen before where people say they’re going to stick with GameStop forever or AMC forever. Now it’s more of a targeted strategy bet.
Do people actually make money from meme stocks?
As with any investment, it depends on when you bought and sold. Some individual investors have made big gains in GameStop, while those who have it now would be running at a loss.
“If you were to randomly select a person who held a position in GameStop at the height of the frenzy, it’s not obvious that person made any money during the GameStop episode. A lot of people kept the action in principle much longer than they should have,” Alex Chinco, professor of finance at Baruch College, told Al Jazeera.
Why the resurgence of meme stocks now?
Widespread inflation has made everyone much poorer, OANDA’s Moya told Al Jazeera.
Millennials and Gen Z are buying homes, have a ton of student loans to pay off, and can’t afford to be loose with their financial investments. But along the same lines, retailing around meme stocks offers an opportunity to go against the grain. And “with so much pessimism around Wall Street, many young people don’t expect the stock market to offer so many long-term bullish betting opportunities,” Moya added.
Rogozinski added, “There’s this do-it-yourself social media influencer mindset and it’s also about the gig economy, where people have jobs and they’re always hustling on the side. . You have these people who say, “I don’t need to pay someone else to control my money.”
Have meme actions affected the broader market?
It seems Wall Street is catering to this new audience.
“The New York Stock Exchange and global market firms are starting to create cheaper, smaller products and derivatives,” Rogozinski said. “They do small versions of futures, micro stock options, which are one-tenth the leverage, so it’s not as dangerous. There really is no financial justification for these products to exist, other than to make things more accessible to this particular demographic.
Does anyone regulate this sort of thing?
The Securities and Exchanges Commission (SEC), the US federal regulatory agency, has looked into the actions of memes and Congress has held a hearing on it, but so far no action has been taken. socket.
In June 2022, the US House Committee on Financial Services released its findings in a report (PDF), warning of the inadequate risk management that led to the stock market trading frenzy. The committee also called on regulators to step up oversight of capital and liquidity, improve oversight of retail “super brokers” and try to better understand how retail traders operate.