The Complete Guide to Meme Stocks: The Role of Human Behaviour in Their Surge

Human behaviour in finance is a fascinating subject, revealing patterns that have remained surprisingly consistent over centuries. While technology and market structures have evolved dramatically, the underlying sentiments driving human actions in the stock market have not. This intriguing constancy can be seen when comparing the tulip mania of the 17th century with today's phenomenon of meme stocks. Despite the vast differences in context and technology, the same human impulses—fear, greed, and the desire for quick gains—continue to fuel market bubbles and crashes.

In 1636, owning a single tulip bulb in Holland was akin to possessing a million dollars today. This phenomenon, known as Tulip Mania, saw an unprecedented surge in demand for tulips, captivating the entire nation. Professional stock traders joined the frenzy, and people began purchasing more than they could afford on credit.

Fast forward to 2021, history may have found a new example in the rise of meme stocks. One thing that stands and remains common is investors are driven by FOMO (fear of missing out) significantly contributed to the rapid rise and subsequent fall of both tulip prices during Tulip Mania and meme stocks today.

What is a Meme Stock?

Meme stocks rise to fame not through stellar company performance, but through the frenzy stirred up by amateur investors on social media and forums like Reddit. The term "meme stock" stems from the viral nature of internet memes—funny ideas, behaviours, or styles that spread like wildfire. Similarly, meme stocks gain rapid traction among traders, sending share prices soaring far beyond their true value as the buzz drives a buying frenzy.

Investing traditionally means putting your money into ventures that create real value and grow fundamentally over time. Meme stocks, however, flip this concept on its head. Instead of being driven by solid business metrics, their appeal lies in the sheer hype and speculative excitement.

Meme Stock Code Language

Meme stock enthusiasts have developed a unique lexicon to describe their activities and community. Here are some key terms, decoded into interesting facts:

Apes: Self-identified members of the meme stock community, initially linked to "AMC apes" during a release of Planet of the Apes. This term symbolizes unity and strength in numbers, reflecting their collective effort in the market.

Diamond hands: A badge of honour for investors who hold onto a stock despite significant losses. It signifies steadfastness and resilience, often celebrated in the community.

FOMO: Short for "Fear of missing out," this feeling drives many investors to jump into trending stocks to avoid regret. It highlights the emotional aspect of trading in meme stocks.

Hold the line: A rallying cry to maintain possession of a meme stock amid market turbulence. It encourages solidarity and perseverance among investors.

Paper hands: A derogatory term for those who sell meme stocks to avoid further losses. It implies a lack of conviction and contrasts with "diamond hands."

Stonks: Meme stock jargon for stocks, popularized by internet memes. It represents the playful and irreverent attitude of the community towards traditional finance.

Tendies: Slang for profits from meme stocks, derived from "chicken tenders." This term emphasizes the playful, sometimes whimsical nature of the community's language.

To the moon: An optimistic expression indicating a belief that a stock will achieve substantial gains. It reflects the community's enthusiasm and high hopes for their investments.

YOLO: Acronym for "You only live once," often used to justify risky investments in meme stocks. It underscores the adventurous and sometimes reckless spirit of meme stock traders.

We like the stock: A phrase used on Reddit to endorse a stock, frequently accompanied by a rocket ship emoji. This phrase often signals a collective bullish sentiment within the community.

Bagholder: An investor who continues to hold a declining stock in hopes of a rebound. This term can evoke sympathy and a cautionary tale about the risks of holding on too long.

DD: Short for "Due diligence," which in the meme stock context, often means unconventional research and analysis done by individual investors rather than professionals.

BANG: A playful variation of "FAANG" tech stocks, referring to meme stocks: BlackBerry, AMC, Nokia, and GameStop. This highlights the community's penchant for catchy acronyms and humour.

ATH: Acronym for "All-time high," referring to a stock's peak market price. Celebrating an ATH is a moment of triumph and excitement within the community.

How Did the Meme Stock Mania Begin?

During the lockdown, small retail investors teamed up to capitalise on GameStop’s low share price. Financial analysts, including some members of Redditt, argued that GameStop was undervalued and heavily shorted.

Short-selling involves borrowing shares to sell them, aiming to buy them back later at a lower price, and pocketing the difference. One of the members of the Redditt community, in his YouTube video, highlighted that GameStop had one of the highest short interests, primarily held by hedge funds. He predicted that a short squeeze, where short-sellers rush to cover their positions, would drive the stock price up.

This triggered a Bandwagon Effect. Herd behaviour occurred as individuals followed the actions of the larger group, ignoring their own analyses. Social media amplified this, as influential community members advocating buying the stock led to more followers, creating a self-reinforcing cycle of rising prices.

Suresh Shukla

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