What Are Meme Stocks, and How Did The Internet Raise Their Prices Over 1000%?

We all know what a stock is: a tiny piece, or share, or a company. So, if you own a share of GameStop, and the company does well, the value of your stock goes up. If it does poorly, it the value drops. Pretty simple stuff, right? Not always.

In this article, we'll break down why.

What Actually is a Meme Stock?

A meme stock is a stock that becomes extremely popular online, not because the company is valuable, but because social media users decide it's cool to buy. This can lead to the price of a stock jumping 100%, 500%, or even over 1000%.

How Did This All Start?

In January 2021, a Reddit group called r/WallStreetBets noticed a trend in the markets: big hedge funds (firms who use advanced trading strategies to attempt to beat the market) were holding massive short positions, which means they betting (big) against GameStop.

As a result, thousands of everyday investors decided to buy GameStop stock, purely to mess with the hedge funds. As a result, the price went through the roof, not because GameStop increased in value, but because the internet wanted to play a prank.

How Exactly Did the Stock Rise SO Much?

Good question. This part is pretty wild.

Remember, these hedge funds, who were the victim of r/WallStreetBets' prank, were doing something called shorting the stock, in which:

1. They borrow the stock and sell it immediately.

2. Later, they hope to buy it back at a lower price.

3. Then they return it and keep the difference.

To give a real world analogy of shorting a stock, let's imagine the scenario with a car instead of a stock. Pretend that your friend just bought a super nice 2025 Porsche for $100,000. However, you, for whatever reason, predict that the value of this 2025 Porsche model is going to drop 50% over the next month.

In order to profit from this possible decrease in value, you ask your friend to borrow the Porsche, with the promise you'll return it to him in a month. Immediately after he lends it to you, you create a post on Facebook Marketplace listing the 2025 Porsche for its current value: $100,000. It's bought immediately, and your buyer comes by to pick it up that afternoon.

From there, we'll go over 2 scenarios:

1. You're correct.

   In this world, the price of the Porsche actually drops more than you expected over the following month. For whatever reason, the car is now selling for $25,000 one month later. At this point, you find a Facebook Marketplace post for the exact model and color Porsche you sold, but this time listed for $25,000. That day, you purchase it, pick it up, and drop it off at your friend's house. At this point, you're $75,000 in profit. Not bad for 1 month.

   
   

2. You're wrong.

   In this scenario, you aren't quite as smart as you think you are. Turns out, there was an extremely rare manufacturing error in this year's model, turning the car into a vintage relic, and skyrocketing the value of the car. Instead of the $100,000 you sold it for, you now have to pay $200,000 to get back the Porsche from your friend. The worst part? The cost has been rising $10,000 every day for the past week. You had been hoping it was a mistake and the price would fall again, but it's becoming harder and harder to wait. Eventually, you decide to take your losses and just spend $200,000 to get the car back to your friend. Net gain at the end: -$100,000. Ouch.

   
   

This is exactly how shorting a stock works, except with a share (or shares) of a company, rather than a car. And unfortunately for hedge fund managers, this story is a lot closer to the second Porsche scenario than the first.

In the GameStop case, when Reddit users bought up the stock, the price skyrocketed (way faster than the car price did). Instead of just doubling, GameStop share value increased 20x, sending these hedge funds into a panic. Just as you wanted to buy back the Porsche to avoid prices rising further before giving it back to your friend, these hedge funds raced to rebuy the GameStop shares they had borrowed. This increase in demand made the price go even higher.

This is called a short squeeze, and it’s exactly as chaotic as it sounds.

So What Ended up Happening?

After the hype cooled off, so did the stock price. Just as quickly as it increased 20x, it decreased almost 90%. In the following months, the stock was extremely volatile, and in recent years, it hasn't even come close to touching the record high set in January 2021.

Some individual investors who were smart enough to sell walked away with massive profits, but the vast majority lost, big time.

When Else Has This Happened?

Around the same time in 2021, stocks like AMC Theatres and Bed Bath & Beyond (which went bankrupt 2 years later) saw massive price spikes fueled by online communities. More recently, similar hype has hit cryptocurrencies, NFTs, and even random penny stocks.

What's the Lesson?

Remember, when all hype is driven by social media buzz rather than real business growth, you should be skeptical. These moments come fast and loud, but they often crash just as quickly. Hype can move prices in the short term, but value wins in the long run. Rather than gambling with these meme stocks, we strongly suggest you just stick to long-term, proven investments, such as index funds and blue chip stocks.