What’s on this page?

1. What are UK tech stocks?
2. How to invest in Meme stocks with us
3. How do Meme stocks work?
4. GameStop: the original Meme stockp
5. Pros and cons of Meme stocks
6. Meme stocks vs other investing strategies
7. Meme stocks summed up

What Are Meme Stocks?

Meme stocks involve companies whose share prices are significantly influenced by social media-driven investor enthusiasm rather than traditional financial analysis. At its most basic, meme stocks are driven almost wholly by sentiment instead of fundamentals — with sentiment liable to change at any moment.

Meme stocks often become popular through platforms including Reddit (in particular, the WallStreetBets subreddit), TikTok, Twitter, and Telegram. Retail investors use these platforms to rally around a particular stock, sending its share price higher through feel-good emotions, memes, viral posts and crowd psychology.

For context, a meme is essentially an idea that spreads rapidly. Memes online usually involve funny photos and videos — many of which are based on very well-known cultural phenomena.

Meme stocks typically display unusual trading volume and price movements, often decoupled from the company's actual business performance or financial health. They're characterised more by their narrative than fundamentals like revenue, profit margin or price-to-earnings ratios.

However, it’s perfectly possible for a meme stock to also be a strong, well-run business — it’s just that for they aren’t valued by traditional market metrics — though often they return to fundamentals once they fall out of favour.

How to invest in Meme Stocks with us

1. Learn more about Meme stocks
2. Download the IG Invest app or open a share dealing account online
3. Search for your desired stock on our app or web platform
4. Choose how many shares you’d like to buy
5. Place your deal and monitor your investment

Investors look to grow their capital through share price returns and dividends - if paid.

But the value of investments can fall as well as rise, past performance is no indicator of future returns, and you could get back less than your original investment.

For investors seeking exposure to diversified Meme stocks, we offer the Roundhill MEME ETF (MEME), which is normally at least 80% invested in meme stocks that exhibit a combination of elevated social media activity and high short interest. Top holdings include Affirm and Coinbase, and it sports a relatively high expense ratio of 0.69%.

How Do Meme Stocks Work?

Meme stocks are born out of a combination of investor attention and community co-ordination. While this is somewhat of a generalisation, there tends to be well-followed stages of development:

1. Identification — a company, which is usually heavily shorted, underperforming, or facing a crisis, is identified by retail investors on social media platforms.
2. Viral momentum — a compelling narrative is created online (for example, saving a beloved gaming retail chain from greedy hedge funds).
3. Social media amplification — Influencers, memes, and quasi-marketing campaigns generate hype. Users post screenshots of gains, encourage others to buy and hold, and frame the movement as a form of financial rebellion.
4. Share price surge — As buying pressure mounts, the meme stock’s share price skyrockets. This may trigger a short squeeze, where short sellers scramble to buy back shares, driving the price even higher.
5. Volatility and decline — the bubble often bursts as early investors take profits and momentum fades. Many latecomers suffer significant losses.

Importantly, it’s worth noting that it can be very hard to identify a meme stock early on. You might think you’re getting in early, when actually you’re buying shares in a stock that simply has poor fundamentals. There are many risks with meme stock investing, which correlates with the high short-term rewards potentially on offer.

GameStop: the original Meme stock

GameStop (NYSE: GME) is the original Meme stock which spawned the entire investing thesis. In early 2021, GameStop was a struggling brick-and-mortar video game retailer with a high percentage of its shares sold short by institutional investors.

A Reddit user — and also YouTuber — named Keith Gill, began buying shares and sharing his bullish thesis on the company on his own channel and also on subreddit WallStreetBets.

The subreddit’s community, viewing GameStop as both a nostalgic brand and an underdog, also started buying up the stock — the goal was partly financial, but also arguably ideological: retail wanted to ‘squeeze’ hedge funds betting against the company, and also exact spiritual revenge for the 2008 Global Financial Crisis.

At its peak, GameStop's stock surged from under $20 a few weeks prior to a pre-market peak of more than $500 per share in late January 2021. For context, the stock was worth as little as $2.57 in April 2020 at the bottom of the pandemic flash crash. Tensions between institutional players and retail were further stoked when platforms started to restrict trading based on liquidity concerns.

GameStop would later spike again, but the stock remains a wider symbol of this new investing strategy, where community, humour and momentum can override fundamentals and make shorting stocks perhaps that bit riskier for institutions.

Pros and cons of Meme stocks

As with all investing strategies, there are advantages and drawbacks to investing in Meme stocks.

Pros of Meme Stocks

• Democratisation — Meme stocks highlight the growing influence of retail investors. Cheap trading costs and access to social media research is allowing everyday people to participate in financial markets like never before
• Gains — some investors have made massive profits in Meme stocks. Early participants in GameStop saw their investments multiply dramatically
• Emotional value — investing in meme stocks can be fun and engaging. There's a sense of camaraderie and purpose, especially when there's a narrative of taking on Wall Street elites.
• Highlighting inefficiencies — the meme stock phenomenon has exposed structural issues, such as naked short selling, payment for order flow, and the power imbalance between institutional and retail investors
• Learning — for newer investors, meme stocks can be a gateway to learning about financial markets, trading mechanics, and risk management

Cons of Meme Stocks

• Extreme volatility — Meme stocks are unstable. Prices can swing wildly within hours, leading to massive gains but also huge losses
• Lack of fundamentals — there's often little in the company’s earnings, business model, or strategy to justify higher valuations
• Herd mentality — investing decisions are frequently based on groupthink and hype rather than sound analysis. Social media can also spread false information
• Regulatory risk — brokerages may halt trading or impose restrictions on Meme stocks without warning. Regulatory bodies may also intervene, adding another layer of risk
• Manipulation — co-ordinated campaigns can sometimes border on market manipulation. Determining where organic enthusiasm ends and pump-and-dump begins can be difficult
• Emotions — the psychological highs and lows of Meme stocks can be intense. FOMO (fear of missing out) and the urge to chase losses often leads to losses

Meme stocks vs other investing strategies

Traditionally, investing focuses on fundamentals like revenue growth, cash flow, competitive advantages, and industry trends. While strategies differ, value investing, growth investing or index fund investing are all built on commonly understood basics including long-term analysis and diversification.

By contrast, Meme stocks are usually volatile, short-term speculative plays based on sentiment and social media. They rely on momentum and timing more than traditional financial indicators. This doesn’t necessarily make investing in Meme stocks a poor idea, but it does make them high-risk, high reward, with the added zest of emotional factors and large attention requirements.

For most investors, it’s probably safe to say that Meme stocks are not going to form the core of their portfolio. However, they can have a place as a small, high-risk allocation.

It’s worth noting that as a general rule, many investors allocate no more than 10% of their total portfolio to high-risk investments, which allows them to participate in potential rallies without risking their financial security. Investors with a strong understanding of market dynamics, trading discipline, and the psychological ability to cut their losses may find meme trading both exciting and rewarding.

The key points to consider include knowing your own risk tolerance, deciding an exit strategy in advance, avoiding FOMO, conducting your own research instead of relying on herd mentality, staying updated as dynamics tend to shift very quickly, and limiting exposure to Meme stocks through a diversified portfolio.

Meme stocks summed up

• Meme stocks are a reflection of a shift in how people engage with financial markets. They embody the tension between traditional investing norms and a new, socially driven investing culture
• While they offer the potential for high returns, they also come with significant risk
• For those seeking stable, long-term growth, meme stocks should be treated with caution and curiosity, not as a substitute for sound investing principles
• Overall, Meme stocks are high-risk, high-reward opportunities shaped by sentiment, community, and the digital age of investing