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What are Meme Stocks and How Do They Work?

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Meme stocks are a pandemic-induced diversion that is now more than a trend and keeps on growing with each passing day. Meme stocks are undermined stocks that are listed in the market of the United States of America. These stocks are without the fundamentals that have gained huge popularity among individuals in a short period. The main reason for meme stocks to gain such popularity is social media attention. Meme stocks come under the category of stocks that, once they start gaining momentum, defies all the valuation metrics. Let’s see what are meme stocks and how do they work.

Importance of meme stocks

The phenomena of meme stock started as a tussle between small investors and the system of trading. It was like a Wall Street movement, but in meme stock, the small investors win the battle. The concept of liquidity has its terms and creates its fundamentals. Meme stocks entering the market were quite helpful for small companies to raise capital. The classic example for meme stocks helping small companies is AMC Entertainment and Game Shop. These both the companies have raised over $1 billion with the help of meme stocks. Meme stocks are also known as the biggest fancy trips by Jeremy Grantham, a financial historian and co-founder of GMO.

Workings of meme stock

The reason meme stock rises in popularity is due to different conversations online, and because of the internet playing a major role, we see a spike in the rise of such stocks. To know more, visit meme scout. The cycle of meme stock is best described as under-

  • Adopter- Some investors believe in a stock of undervalue and start buying them in bulk. This, in turn, raises the stock price of that particular stock. This is the same situation that happens with the meme stock. The investors thought that it has potential and start to invest in it. This, in turn, increases the prices of meme stock.
  • Middle- In this phase, some investors pay attention to their surroundings and begin to notice the gradual change in prices of the stock. This is the time when they start buying the stock in large quantities and trigger a chain reaction. More people start investing in these stocks, and this led to an increase in stock prices. Following the principle of demand. Higher the demand, the higher the price.
  • Late- This phase consists of investors who join late in investing in the stocks. They start to invest when the word goes out about a particular stock across different online forums and social media pages. This results in fear of missing out, and more people join in.

Conclusion

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These are the three phases in the working of meme stocks and their sudden rise in popularity. In all three phases, it is the investors in the first phase that makes a lot of profit. Once the stock enters the late or last phase, it is very unlikely to make a profit. The late phase is sometimes known as the FOMO phase.