At a glance:
Baking sourdough bread, TikTok dance challenges, celebrity-hosted podcasts. Thanks to social media, a lot of new trends have gained popularity during the pandemic. But perhaps the most baffling trend of all has been the rise of meme stocks.
A meme is defined as an idea, behavior, or style that spreads quickly from one person to another, often via social media. Meme stocks experience similar surges in viral activity. Users on social media platforms may encourage others to invest in a company’s stock for no other reason than to see the price increase, often with little or no regard for the company’s fundamentals (revenue, profits, etc.). The excitement around the company builds quickly, and when there’s an influx of buy orders for the stock, the stock price soars. However, many of these companies’ stock prices fall soon afterward, which can leave some investors wondering why they invested in the first place.
Meme stocks are different from traditional stocks in the way they perform and why. A traditional stock’s price is driven by the company’s performance—maybe the company announced increased profits, a promising new CEO, or an acquisition of another company. In contrast, a meme stock’s price is often driven by the stock’s popularity on social media. Online investors will encourage others to purchase the stock, and before long, the price has soared. Because of this sudden surge in popularity, meme stock prices often rise and fall much more quickly than traditional stock prices.
The meme stock frenzy is a side effect of a larger societal change: investment learning via social media. Social media has become a platform many younger people use to learn new information, and as a result, financial advice has flooded social media channels in the past 2 years. According to a recent survey, 12% of investors ages 18–34 learned how to invest from social media research, compared with only 3% of investors ages 35–64 and 1% of investors ages 65 and older.* Thousands of these young investors base their investment decisions on advice they find online and then share this advice with their peers. This behavior often drives popular trends like meme stocks.
As always, Vanguard encourages you to focus on what you can control: creating clear, appropriate goals; having a diversified balance of investments to help achieve these goals; keeping costs low; and having a long-term discipline so you can put today’s hot stocks in perspective. We have a brokerage platform where you can trade a variety of carefully curated products that tie back to these investing principles for success. We encourage you to use our online resources to learn more and find the right investments for your portfolio.
*SurveyMonkey. CNBC | Momentive Poll: “Invest in You” August 2021. August 2021.
All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.