Meme Stocks: When Social Media Hype Meets Wall Street

Kotak Insights | Date 09/11/2024

You are in a cricket stadium full of people.

It is the last over of a closely contested match, and the crowd is electrified.

Cheers start building up like a wave as the bowler runs up to the pitch.

Now, it is not about the game; it's the buzz, the eagerness, and the excitement running through the veins of everyone around you.

Just visualize the same amount of money pouring into the stock exchange.

That is how it happened with meme stocks in GameStop and AMC captured by Wall Street.

These firms were just normal, broke companies until the online public rallied behind them, triggering a wave of hype to be ignored even by these seasoned investors.

Yet, just like the last over of a cricket match can flip in a heartbeat, the meme stock phenomenon carries unpredictable risks and rewards.

This phenomenon has disrupted the traditional market dynamics, causing a ripple strong enough to rattle even the seasoned Indian investors.

So, what are meme stocks?

Meme stocks are stocks of companies popularized, mainly by social media buzz rather than financial performance.

Many retail investors look at this as more of a culture movement to make money rather than a straightforward financial investment.

The Perfect Storm: How Meme Stocks Took Off

The meme stock movement started even back in 2021.

Retail traders of a few communities in Reddits started discussing the idea to unify with other enthusiastic fans about investing in buying shares to raise for a desperate video game retailer standing between the hedge fund community shorting the latter firm.

However, a short squeeze—a situation in which rising stock prices force investors to cover their losses by buying back stock, and the price rises further in the process—was exactly what a group of retail investors saw as an opportunity.

Within a short few weeks, GameStop moved from under $20 to well over $350, thereby making the company an unlikely global phenomenon. AMC Theatres and Bed Bath & Beyond have leapt in step with these retail investor crazes as well.

What made the meme stocks different was not merely the price movement but was also a way to fight back against the perception of markets being manipulated by hedge funds and Wall Street elites.

This was the reason why this combination of social activism and investment was bound to lead finance and popular culture head on.

However, such meteoric rise had its due consequences as, for every smart trader who made a small fortune, many others were holding the bag as prices went eventually down.

Let's see the risks and rewards associated with meme stock investing.

While meme stocks may offer exciting short-term winnings, they are relatively dangerous. Meme stocks have absolutely nothing to do with common stocks; their prices skyrocket and plummet mainly because of social media hype. For this reason, they are very speculative.

Volatility remains the biggest risk. The meme stocks might soar or plummet sharply in a matter of hours, leaving even the most agile trader lagging behind the pace of such rapid changes. Fear of missing out is also what often translates into emotional investments.

While most meme stocks ignore metrics like price-to-earnings ratios or earnings reports, value actually flows from online sentiment-the hype which can disappear as fast as it appears. That is why even institutional investors advise caution when working with these stocks.

While risks are involved, meme stocks have rewards. Viral attention on Reddit and Twitter(X) pushes prices way above expectations and creates massive opportunities for short-term gains.

The GameStop saga proved that retail investors, armed with social media, can disrupt institutional players and even turn the tables on Wall Street's biggest hedge funds.

India and Meme Stocks: Could it happen here?

India has not witnessed a meme stock frenzy yet, but the potential is enormous.

Retail investors in India have been astonishing since trading platforms emerged that made it more accessible to trade in the stocks. More and more young, tech-savvy investors are now entering the markets due to democratization of trading platforms.

Indian subreddits are gaining momentum just like their US counterparts. Here, Indian investors discuss stocks, predict price movements, and sometimes even try to orchestrate buying frenzies.

Much smaller in scale than the US, a meme stock movement is starting to gain traction here. Still, what is important for Indian investors is to learn from this U.S. experience.

A social media-driven stock movement can lead to short-term wins but also long-term risks. Regulatory bodies such as SEBI have steps in place to curb excessive speculation, but no regulation will be able to fully prevent retail-driven disruptions.

Key Messages for Investors

The meme stock phenomenon has thus proven that there is a strong sense of urgency for investment discipline and caution.

While a strong social media-driven trend can indeed entice the investor, who has no other reason but short-term gains, they must not forget to focus on the essence of fundamental analysis and long-term strategies.

Sustainable investment, after all, involves keeping an eye on the health of a company's financial condition and potential long-term development.

Young investors should be more alert of such bubbles that are going to be formed amidst the increasing wave of financial literacy in India.

Essentially, meme stocks will thrill some for that "fun, thrilling ride" but for most people, they would be a source of "learned helplessness."

The meme stocks are the future

As a phenomenon, globally meme stocks proved retail investors can create market dynamics.

The more retail investment that floods into the markets in India, the better the chance of a movement in the meme stock of India. However, Indian investors must learn from their cousins in the US-their volatility, hype, and short-term speculations generally do not contribute to wealth over time.

For now, the Indian market is steady. But, as the digital trading platforms grow and the influence of social media goes up, investors will be on the lookout.

The meme stock trend might be born in the U.S., but its lessons are up for grabs by every investor around the world.

The above images were generated using AI.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262.