What are meme stocks—and should you invest in them?

Meme stocks are named for the internet sensation of memes: humorous ideas, behaviors, or styles that go viral. They’re stocks that gain rapid popularity from the hype created by amateur investors on online forums and social media platforms rather than gaining interest from positive company performance. The viral nature of a meme stock means share values can often skyrocket well above their estimated value, creating a trading frenzy.

Brian Ford, Head of Financial Wellness at Truist, says investing in meme stocks shouldn’t even be considered real investing.

“The idea of investing is putting your money to work in something that will deliver value to other individuals and, therefore, grow in its fundamentals,” Ford says. “Meme stocks have nothing to do with that. In fact, it’s the opposite.”

The phenomenon revealed the power of online forums and the disconnect between a stock’s price and the company’s performance. Since then, the excitement may have diminished, but meme stocks continue to exist.

“Develop your own good systems and habits to keep you on track no matter what’s happening in the news. Have a good financial plan, work with a financial planner, and then stick to that plan.” —Brian Ford, head of financial wellness at Truist, on the podcast Money and Mindset With Bright and Brian.

How meme stocks work

When the hype behind a meme stock causes an avalanche of activity, it can lead to something called a short squeeze. A short squeeze occurs when investors bet a stock’s price will go down, but instead the price goes up. Here’s how that happens:

1. A stock is “shorted.” Short selling is a trading strategy where investors speculate on a stock’s decline. Short sellers bet on—and potentially profit from—a drop in the stock price.

Some investors do this when they think a stock is overvalued. Instead of buying and then selling a stock, they borrow shares so they can sell them at the current price. But at some point, the borrowed stock will need to be returned. The investor is betting on the stock price to decline in value so they can purchase the borrowed shares back later at a lower price.

The investor could profit from the difference between the price they paid to purchase the borrowed stock and the price at which they sold it. But in the event of a short squeeze, this could go in another, less desirable direction.

2. The stock increases in value. If this happens, the investor must pay the difference. They will have to pay a higher price to purchase and repay the borrowed shares. If they borrowed a lot of shares, this difference can add up fast.

3. Investors with shorts start to panic buy shares to try to mitigate their losses and pay back what they borrowed.

4. The sudden surge in demand increases the price even more, and that creates a short squeeze.^{Disclosure 1}

GameStop was just the first meme stock to go viral among retail traders and make mainstream news. Movie theater chain AMC, car rental company Avis, and home goods retailer Bed Bath & Beyond are just a few more public companies that became meme stocks in 2021. Their share prices soared as buzz began online, then they quickly fell. Now, many of these meme stocks are nowhere near their all-time highs, but they’re still considered to be dramatically overvalued in price.

Are meme stocks a good investment?

Meme stocks can be appealing to investors because they appear to promise a big return in a very short period, but if it sounds too good to be true, maybe there’s a reason. Meme stocks can be especially risky because they entail a lot of financial speculation since their value isn’t based on the predictability of company performance, assets, and earnings—all things that typically make a stock hold value over time (and increase your earnings).

“I would classify investing in meme stocks as speculating,” Ford says. “Speculating is simply betting money on a highly unpredictable economic venture.”

Ford compares investing in meme stocks to gambling—but perhaps with less of an entertainment factor.

“It’s all just based on a trend,” he says. “We don’t really know where it’s going to go. We don’t know when it’s going to stop. There isn’t any actual fundamental value being delivered other than the fact that a bunch of people are buying it, and therefore, it’s artificially inflating the price.”

While a small percentage of people can make money on meme stocks, Ford says the majority lose because there’s no way of knowing when the stock will plummet.

Still want to invest in meme stocks?

Although most financial advisors recommend against doing so, there is a more responsible way to approach investing in meme stocks if you’re intent on doing it. Ford says if you’re doing everything else right—you have an emergency fund, are growing your net worth, don’t have consumer debt, are maxing out retirement accounts, and have a diversified portfolio—then it may be OK to put a small percentage of money into meme stocks. It’s always wise, however, to discuss your personal situation with a financial advisor before getting into risky investments.

Other investment options that would be considered less risky than meme stocks include:

• Low-cost index funds: Investment funds that track a specific collection of assets—known as an index—which includes stocks, bonds, and other assets. The most well-known index is the S&P 500, which is made up of about 500 of the largest publicly traded American companies.
• Individual retirement accounts (IRAs): IRAs can be another way to safely invest your money for the long term. There are two kinds: traditional and Roth.
• Exchange traded funds (ETFs): ETFs invest in a basket of stocks, bonds, or other assets, but generally have lower expense ratios than mutual funds.

Read more: Investing for beginners: Key terms you should know and Roth vs. traditional IRA: which is best?

For most investors, time in the market is more important than timing the market. The likelihood of gaining wealth through the stock market increases when investors play the long game—and meme stocks are just the opposite. Ford’s overall recommendation echoes that of other investment experts: “I think people should stay the course.”