Meme actions are the result of applying popular culture in financial markets. The list of companies converted to meme shares on US stock exchanges has been expanding in recent months and already splashes across a broad group of companies. But what exactly are meme actions?
According to the information from the Dotbig website, Meme shares are companies listed on the market whose price is driven by investor platforms created in internet forums. In other words, they are stocks that rise in the market thanks to positive comments on platforms and investor forums that bring together thousands of small investors. Social networks do the rest.
These comments attract potential small investors who might not otherwise buy stocks. Thanks to the joint action of all of them, its value shoots up. This was the case in the most striking case of meme actions, that of the video game store chain GameStop, which rose by 600% in value.
Meme shares: investment spread on social networks
Experts explain that meme actions reflect the democratization of investment in the stock market and the rise of social networks as a means of information. The confinements generated by the pandemic have also encouraged online operations and information exchange among investors.
Low capitalization but known to investors
But these meme actions share other common characteristics as well. For example, these are small-cap companies but are well known to investors. This means that they attract many former users to their forums, attracted by values that represent a part of their youth.
In other words, investors share memories in the forums of these companies from past and better times, which encourages empathy with companies that are already far from their best days. These are the cases of the AMC cinema chain or the GameStop video game store.
But the list is broader and includes old technology companies that at the time were market leaders such as Nokia or Blackberry or from other sectors such as Bed Bath & Beyond, Clover Health Investments Corp, Clean Energy Fuels Corp, Draftkings Inc, Microvision, Novavax, Palantir Technologies, Peloton Interactive Inc, Sundial Growers Inc, Workhorse Group.
The key is a certain sentimental attachment to the value
A group of foremost decided to become shareholders was the entry into the capital of GameStop of investment funds vulture, which intended to sink the company with short positions.
GameStop: the first meme company
The foremost did not want to play against their 'old friend' and joined forces to defend her as this was a small company, a few too many allowed the funds to take heavy losses and go out of value by closing their short positions. Thus was born the first meme company.
After GameStop, there have been similar situations of savers who defend certain companies to which something nostalgic joins them, such as the case of AMC, but they have no longer been so popular.
However, terms such as the 'meme rally' or the 'meme squeeze' have emerged that explain a new investment strategy among retail investors. Apparently, there is a tendency for these investors to support small and troubled companies that have a strong social media presence of former users.
But not only emotional factors explain the meme phenomenon. Behind it is also a calculated investment strategy in companies with a high proportion of short positions. The strategy seeks precisely to force the closure of these positions with strong upward pressure on the value. As the price rises, investors with short positions have the holding to increase them, but there comes a time when they cannot bear the losses and are forced to close them. This process, known as a short squeeze, ends up driving the share price even higher.
Without fundamentals and very volatile
From a market point of view, meme stocks lack fundamentals to support them and are highly volatile. However, the truth is that the first cases of meme actions did have support. That joint sentiment that the market ignored drove the entry into the value of small investors to defend something that, in a way, they considered theirs: the store where they bought their first video games or the chain of cinemas in their neighborhood.