First, we have to go back to the idea of memes. Memes are essentially visual jokes that become part of our shared popular culture. We use memes because a goofy image with a few words can speak volumes.
So how did stocks become memes?
Stocks became memes almost because of OPPOSITION.
Once Wall Street boomers said #wallstreetbets generation traders' favorites likes AMC (AMC) and GameStop (GME) are worthless or just plain bad, it sort of became a trolling meme to buy the stocks, talk about them, and laugh when they went up.
So let's lay out some actual criteria for a #memestock.
1) #memestocks Get a Large Social Following on Facebook and/or Reddit
A stock first becomes a meme stock when a large social media group on Reddit, Twitter, Facebook, or TikTok focuses on a stock flying below the radar.
The most notable group is referred to as WallStreetBets and this active group was responsible for the rise of AMC and Gamestop.
Typically, the stock must see major increases in trading volume without any real change in news or fundamentals.
This increase in trading volume comes from the social media groups pooling a bunch of investors together all at once.
2) #memestocks Are Typically Heavily Shorted By Hedge Funds
#memestocks are typically heavily shorted by hedge funds. The most famous example of this was the GameStop situation, where the stock was aggressively shorted by major hedge funds, most notably Melvin Capital.
The hurt put on Melvin Capital was considered a major victory by the #wallstreetbets and #memestock world.
A short squeeze happens when traders aggressively buy a stock to drive the price up. The rising price can force shorts to lose money and cover their short positions, giving the stock even more upside momentum.
This is part of the reason why GameStop ended up going to $483 in January 2021.
3) #memestocks Typically Have Some Cultural Value
One reason AMC Theaters, Gamestop, Blackberry (BB), and Bed Bath & Beyond (BBBY) became meme stocks is their cultural impact on society.
These are major brands people know and love - or at least knew and loved in the past.
Hedge funds want these stocks to go down.
And the #wallstreetbets #memestocks crowd want to stand in the way and make the stocks fly higher - defying Wall Street.
4) #memestock Are Extremely Volatile
Make no mistake: #memestocks are VERY volatile and you have to be careful trading them.
As an example, from January 1, 2021 to July 30, 2021, AMC moved 11% per day on average. There was even one day when it went up over 300%.
Meanwhile, the S&P 500 Index moves less than 1% per day!
Not All #memestocks...
The most popular #memestocks fit all the above criteria. AMC and GameStop are the most obvious ones.
But not all do.
For example, gaming hardware company Corsair (CRSR) has a big following in the #wallstreetbets community, is heavily shorted, and can be volatile. But it's not quite a household name to the masses.