What Is A Meme Stock?
2 021 is not a normal year, much like its predecessor. The worlds most valuable companies, such as Apple and Amazon, are posting record revenue and blowout quarters, but are far from all-time highs. Instead, two previously beleaguered stocks  AMC (NYSE: AMC), and GameStop (NYSE: GME)  dominate the headlines. This article was originally written by MyWallSt. Read more market-beating insights from the MyWallSt team here. Having undergone a massive short-squeeze in January, fuelled by Reddit investors, and more specifically, the subreddit r/wallstreetbets, these companies are smashing records once more. Between GameStop, AMC, SPACs, and NFTs the moniker of meme stock is well and truly back for the summer. Whether you pronounce it meem, mehm or, god forbid, me-me, as social media has grown in importance in modern life, the ubiquitousness of memes has grown with it. So much so, it has even pervaded the stock market. Meme stocks have become a buzzword in certain investing circles over recent years and the accompanying hype has resulted in significant shifts in valuations. Just look at the power that Reddit and Twitter have had over the market in recent months. A meme stock isnt as easily defined as a growth or value stock, so to give it a definitive categorization would be inappropriate. Nor would actually categorizing it alongside growth and value stocks. They wont be found in textbooks anytime soon, but to overlook their impact could potentially be an expensive oversight. Some of the common characteristics meme stocks share are theyre usually overpriced and experience spikes of rapid growth in short spaces of time. Popular amongst millennials and Gen-Z, they are prone to high volatility with valuations based around potential rather than financials  or in GameStops case, not potential at all but simply taking advantage of the system. Usually, the sentiment around the stock is positioned around the future problem it solves, with talk of valuations very low down the list and usually only proposed by bears. FOMO is a big motivator to buy, while panic-selling at the slightest headwind is common, adding to the stocks volatility. A peek at marijuana companies like Tilrays and Canopy Growths long-term charts show a timeline of such stocks which are governed by hype rather than logic. There are two main contributing factors that have led to the birth of the meme stock: commission-free trading and online investing communities. Initiated by companies like Robinhood, before being undertaken by some of the more established names like Charles Schwab and TD Ameritrade, commission-free trading has opened up the stock market to the wider public and facilitiated trading at any level. Online investing communities found on social media sites Reddit and Stocktwits are also a big factor in the birth of the meme stock. Stocktwits, a social media site much like a version of Twitter dedicated solely to stocks, has millions of members, while subreddits r/stocks and r/investing boast are growing daily. These numbers, along with the 6.3 million self-proclaimed degenerates which make up the now-infamous r/wallstreetbets subreddit, hold some significant clout in molding market sentiment. $GME calls to the moon is the current call-to-arms pervading the online community. The truth is that not all meme stocks are to be treated as pariahs. Take Lemonade (NYSE: LMND) and Beyond Meat (NASDAQ: BYND), for example. At the beginning of June 2021, these two got caught up in yet another Reddit-induced mania, sending share prices soaring. The issue here is that their prices could soon outpace their fundamentals, setting investors up for disappointment at their next earnings call, and resulting in selling. Just because hype surrounds certain companies doesnt mean their operations are affected. Whether it is in a future-relevant industry, has a visionary CEO, or is at the forefront of a megatrend that is about to sweep the globe, there is a reason that these companies get so much attention. What is affected, however, is its stock price. Anyone buying into these stocks is going to have to pay a premium, and they must be prepared for a lot more volatility. The trick is being able to identify the difference between deserved hype and hot air. MyWallSt gives you access to over 100 market-beating stock picks and the research to back them up. Our analyst team posts daily insights, subscriber-only podcasts, and the headlines that move the market. Start your free trial now!