Meme Stocks - Are They Worth Your Hard-Earned Money?

Written By Ben Broadwater

Updated May 16, 2024

Meme stocks have become a hot topic in the investment world. But what exactly are they, and are they worth your hard-earned money? This article dives into the world of meme stocks, exploring what they are, how to identify them, and the risks and rewards of investing in this unconventional asset class.

meme stocks

What are Considered Meme Stocks?

Meme stocks are a unique breed in the investment world. Unlike companies valued based on traditional metrics like earnings and profitability, meme stocks rise and fall based on online hype and social media fervor. Imagine a funny cat video going viral, but instead of chuckles, it triggers a buying frenzy that sends a company’s stock price soaring. That’s the essence of a meme stock.

These surges often begin on online forums like Reddit’s infamous r/wallstreetbets. Here, passionate retail investors (individual investors, not big institutions) gather to discuss investment ideas. If a particular company catches their eye, a snowball effect can occur. Positive posts, analysis, and memes (cultural references spread online) create a groundswell of excitement. Suddenly, everyone seems to be talking about this company, and individual investors jump in, driving the stock price up in a short period.

Is a Meme Stock a Good Investment?

Meme stocks offer the tantalizing possibility of high returns. The GameStop saga of early 2021 serves as a prime example. Retail investors, banding together online, sent the stock price on an astronomical ride. However, this meteoric rise was fueled by pure hype, not necessarily the company’s underlying value.

The danger lies in the inherent volatility. Meme stocks can plummet just as quickly as they skyrocket. When the online buzz fades, and reality sets in, investors may flee, causing the price to crash. This “meme stock rollercoaster” can leave unsuspecting investors with significant losses.

Why is a Stock Called a Meme?

The term “meme” originates from the online world and refers to information or ideas that spread rapidly, often accompanied by humor or inside jokes. Similarly, meme stocks gain traction through vibrant online communities. These communities share information, dissect news articles, and create a narrative around the company, turning it into a cultural phenomenon within the investing sphere.

How Can You Tell if a Stock is a Meme?

While there’s no foolproof way to identify a meme stock, some telltale signs can help you navigate this volatile landscape:

  • Heavy Social Media Buzz: Keep an eye out for a sudden surge in mentions of the company on platforms like Reddit and Twitter. Trending hashtags, frequent discussions on forums like r/wallstreetbets, and a general online buzz can be indicators of a potential meme stock.
  • Retail Investor Frenzy: Meme stocks often experience a significant increase in trading volume driven by individual investors. If you see a stock with an unusually high trading volume compared to its average, it might be worth investigating further to see if it’s being fueled by online chatter.
  • High Short Interest: Short sellers borrow shares of a company, betting the price will go down. In the case of meme stocks, a high number of short sellers can create a volatile situation. If the stock price starts to rise due to online hype, short sellers may be forced to buy back shares to cover their positions, further pushing the price up in a phenomenon known as a “short squeeze.”

Related Content: How To Short A Stock On Robinhood

Remember, these are just some indicators, and the meme stock world is constantly evolving. By understanding the hype machine behind meme stocks and conducting thorough research on the underlying companies, you can make informed investment decisions and avoid getting caught in the meme stock craze.

What are the Best Meme Stocks to Buy?

This is a tricky question. By their very nature, meme stocks are unpredictable. Financial advisors typically recommend against chasing meme stocks due to the inherent risk. However, some resources like financial news outlets and social media analysis can point to potentially hot meme stocks. But remember, any investment decision should be based on thorough research and your personal risk tolerance.

  • GameStop (GME): The granddaddy of meme stocks, GameStop stormed onto the scene in early 2021 when a Reddit forum coordinated a buying frenzy, sending the stock price soaring. While GME remains a favorite on WallStreetBets, its business fundamentals are still under scrutiny.

meme stocks - gme chart

  • AMC Entertainment (AMC): AMC, the world’s largest movie theater chain, became a meme stock darling as moviegoers returned to theaters post-pandemic. AMC’s high short interest also fueled a short squeeze, but the company faces challenges like competition from streaming services.

  • Coinbase Global Inc (COIN): This leading cryptocurrency exchange saw its stock surge in early 2021 alongside the broader crypto boom. While COIN can benefit from increased crypto adoption, it also faces regulatory uncertainty and is tied to the volatile crypto market.

  • Palantir Technologies Inc (PLTR): This data analytics company with government contracts gained meme stock status due to its association with big data and potential for growth. However, PLTR’s lack of profitability and complex business model make it a speculative investment.

  • Blackberry (BB): Once a smartphone giant, Blackberry has pivoted to cybersecurity software. While BB has a loyal fanbase and potential in the cybersecurity space, its meme stock status comes with volatility.

  • Rivian Automotive (RIVN): This electric vehicle (EV) startup went public in late 2021 and quickly became a meme stock due to the red-hot EV market. However, RIVN is a young company with no production history, making it a high-risk, high-reward investment.

The Bottom Line

Meme stocks can be a thrilling but risky investment. While the potential for high returns exists, the chance of significant losses is equally real. Before diving into the world of meme stocks, carefully consider your investment goals and risk tolerance.

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