A look back at the most popular shorted meme stocks

The name ‘meme’ comes from the Greek word “mimema” which means “imitated”. It is often used to refer to funny images, videos and pieces of text that gain traction by being copied and shared hundreds of thousands of times in a short period. This type of content goes viral and some memes have more reach and staying power than others.

You may be wondering what this has to do with the stock market. Well, the answer is simple; any shares that are odd, humorous, or have little chance of becoming worthwhile stock options can be taken under the wing of social media users and boosted into popularity with little to no reason other than their likeability. Many of them are similar in the fact that they are heavily shorted by large institutions, meaning that hedge funds are included, alongside tech stocks and pharmaceutical stocks that have some decent potential.

Popular meme stocks include:

Shorting stock is a popular trading technique that focuses on selling stocks that aren’t personally owned by the trader. Many individuals take out loans to be able to take up positions to borrow shares, sell them and then buy them back later for less money. As meme stocks typically have a low number of shares that can be actively traded, price appreciation occurs and meme shares become more valuable. Find out more about how to short a stock.

What happened to GameStop is a good example of the potential of meme shares; its stock price doubled in just 90 minutes in February 2021 and hit an average of around £200 for a whole month before dropping back to regular prices.

When taking a quick look into meme stocks and their origins, you may question their viability as trading commodities, their potential to make you money and even the longevity of any given one at any time. You’ll find that with more in-depth research there are some interesting insights, so let’s take a look at the main reasons why these haven’t yet been dismissed in the wider trading community.

The online environment, social media and meme culture

When it comes to meme stocks, interest is typically generated through social media giants Reddit (usually via the subreddit WallStreetBets) and Twitter.

Here, trading enthusiasts share their thoughts, predictions and support for a trading vehicle and other uses will decide if it appeals to them enough to buy shares. With millions of users on each platform worldwide, the reach for new stocks is unparalleled.

Many brokerages offer zero commission

Just a few years ago, commissions for trading were often high and took a chunk out of profits, making the risk vs reward just too high for many to make the decision to participate. As online brokerage Charles Schwab began zero commissions on stock trading in 2019, many others followed close by to remain competitive in the market, and many more individuals saw the potential in trading than ever before.

Financial markets are subject to change - and while all trading assets are considered to be volatile, meme stocks can be especially so. As they have to potential to generate big losses, many brokerages have stopped this type of trading to minimise damage to the wider community. In order to minimise risk when trading, ensure to make use of a demo account and other risk management tools such as stop losses.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Please note that past performance is not a reliable indicator of future results.

Read more: Advanced CFD trading strategies