Remember GameStop back in January? If you don’t, here’s a recap:
There is a subreddit (a specific online community on the social media website Reddit) called r/wallstreetbets, where retail investors (normal people like you and me) post their earnings, wins, losses and a lot of memes in relation to the share market. These Redditors were purposely driving up the price of shares of a company called GameStop.
By driving up the price of these shares, it would, in the minds of the Redditors, bankrupt super-rich hedge funds. How? People posting on r/wallstreetbets knew certain hedge funds were betting on the GameStop stock going down. Many of the users bought GameStop shares, making the price go up. It was kind of a joke, but also taken quite seriously.
What has happened since?
Since the GameStop fiasco in January, the idea of ‘meme stock’ has been brought to the forefront.
A ‘meme stock’ refers to shares of a company that has gained popularity due to the surge in discourse about that company’s shares and stocks on social media platforms, especially Reddit (like we saw with GameStop). The share price usually spikes unnaturally high (or crashes) due to the hype surrounding it from social media platforms.
Why are ‘meme stocks’ controversial?
They have a high risk attached to them. While there can be big returns on investment if the retail investor gets in at the right time, there can also be large losses too. Once investors start selling those ‘meme stocks’ to lock in their gains, the price of the stock can plummet, sometimes quite dramatically and in a very short space of time. These rapid rises and falls in share price can catch investors out, resulting in massive losses, in some cases more than the investor originally put in. The volatility of the meme stocks provide a high-risk-high-return situation for those speculating, which makes them controversial due to encouraging risk-taking behaviour.