What are meme stocks? Why are they trending on the US stock market?

Meme stocks are US-based stocks whose share prices rise instantly because everyone on the internet is talking about them and hyping them up, unlike normal stocks. This includes stocks like Bed Bath and Beyond, AMC Corporation, and GameStop Corp, whose share prices have risen by over 20% in the last 5 days.

So, what do meme stocks even mean? Just like the way a few funny memes go viral, a meme stock is basically when a select stock itself goes viral online, causing investors to purchase them. A company's stock normally trades in higher volumes (and is traded by a larger number of people) if the company's actual operational performance is great. But the same is not the case with meme stocks.

Meme stocks are basically a few select stocks that go viral on the stock market in a matter of a few days due to the word-of-mouth publicity on social media, like Reddit (a Reddit forum called WallStreetBets) and Twitter. Both financially good and bad companies can become meme stocks overnight, but what matters is what stocks the internet is talking about. In this case, its US-based companies called 'Bed Bath and Beyond', 'GameStop' and 'AMC' that have given investors crazy returns. 

How does the price rise so fast? The price rise in meme stocks comes solely from social media conversations. Though normal stock prices can take one to two years to increase by 30 to 50%, meme stocks can make that move about overnight. This substantial rise is possible even when the company hasn't really done anything to see such kind of growth. A steep price rise gets more people talking about the stock on Reddit forums and this leads more people to put their money in these stocks. 

When the internet gets talking, thousands of retail or non-professional stock traders and retail individuals end up buying large quantities of the stock, thus driving the price up.

Is this a #NewBullMarket? Unlikely, when the first inclination of investors is to jump back into #meme stocks. When the #bearmarket is over, you likely won't see this type of #speculative behavior. @RealInvAdvice @SoberLook pic.twitter.com/5MlfdrFSxg

— Lance Roberts (@LanceRoberts) August 9, 2022

Why and how did it start in the first place? In January 2021, a Reddit forum called 'WallStreetBets' started talking about how particular companies' stocks were being short-sold by some rich investors (ie, an intraday move where shares are sold first at a higher price and bought back at a lower price on the same day when the stock price falls). Since the rich investors were betting for the share prices to fall, the Reddit forum 'WallStreetBets' began a challenge to prove these rich guys wrong and get them to suffer losses. That's why, hundreds joined the Reddit channel, bought these stocks, and drove the share prices higher to make the rich short sellers incur some losses. 

The price change cycle moves in four stages: 

• Early adopter phase: A few investors start buying large quantities of stocks of companies when they feel that the share price is undervalued.
• Middle phase: Other investors notice the large quantum of buying in the stock and the rise in prices. More people buy and the price shoots through the roof.  
• Late / FOMO phase: The stock goes viral on Reddit and Twitter, and more people jump in because of 'FOMO'. 
• Profit-taking phase: Now that the price has peaked, the earliest investors (who joined in the early adopter phase) start selling. This trend begins a chain reaction as people replicate the behaviour.   

The meme stocks today: 

1. GameStop Corp: US-based Gamestop Corp's share prices rose by more than 20% in a matter of 5 days.

 2. Bed Bath and Beyond: Bed Bath and Beyond's stock prices seem to have increased by 97% in over 5 days and early investors seemed to rejoice!

3. AMC: AMC Entertainment's share price increased by 54% over 5 days.