What are meme stocks, what causes stupefying moves in such stocks, how to find the next meme stock and other questions answered

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The meme stock mania, which began with video game retailer GameStop Corp in January and spread to cinema operator AMC Entertainment, is once again gaining momentum.

The so-called meme stocks such as AMC Entertainment, Clover Health and Wendy's continued to rise for the second consecutive day on June 8, sparked by social media innuendos that have caused wild rumblings on Wall Street since the beginning of 2021.

Chamath Palihapitiya-backed Clover Health was the leader of the pack, surging as much as 109 percent on Tuesday, after rising 32.4 percent on Monday.

Traders had exchanged shares worth more than $14 billion of the Medicare-backed insurance seller by the close, eclipsing the company's overall stock market value of about $9 billion. According to HypeEquity data, forums such as Wall Street Bets were abuzz with words "short" and "squeeze" while discussing the company.

The stock of American international fast food restaurant chain Wendy's rallied nearly 26 percent on June 8. A post on Reddit thread Wall Street Bets explained why it is "literally the perfect stock." Mad Money's Jim Cramer also tweeted the share price "deserves to be higher."

Other stocks such as Blackberry and AMC Entertainment also extended gains on Tuesday, building upon the momentum of Monday.

What are meme stocks?

Unlike meme coins such as dogecoin or shiba inu, which literally are a parody of other tokens with no intrinsic value (debatable), meme stocks are real companies with real businesses.

However, the concoction of hype and FOMO (fear of missing out) has caused sharp spikes in stock prices, completely disregarding the fundamentals of the underlying.

What causes the stupefying moves?  

The rally in meme stocks is primarily driven by retail investors and is powered by a social media frenzy.  Their collective might have helped them usurp large institutions' stronghold on Wall Street, in what has been nothing short of a financial coup.

Online forums discussing the "next big stock" have gained precedence minting life-changing gains for these unlikely winners.

Meme stocks got the name because their explosion in trading volume stems from interest and promotion on social media.

Where can I find the next meme stock?

To find the next meme stock, one must dig deep in the annals of social media.

As mentioned earlier, meme stocks are not picked on the basis of their fundamentals or future potential. They are more often struggling businesses that have fallen on the wrong side of hedge funds.

Take GameStop for example, the stock was heavily shorted by institutional investors. The rise in its prices sparked by retail investors influenced by social media hype forced these big institutions to get out of their short positions, creating a snowball effect that took the stock to unprecedented high levels.

Are all meme stocks trash?

Experts have argued that amid the scores of meme stocks that have gained traction recently, there are some decent companies and potentially even a few big opportunities. According to them short-term viral movements, should not dissuade investors as most of these companies are pretty different, with different stories and long term possibilities.

"For example Hertz, which was supposed to be a retail investor graveyard, actually exited bankruptcy with its equity value intact. The same exact thing happened with U-Haul about 20 years ago, by the way," DataTrek’s Nicholas Colas wrote in a note this week.

The stock of Hertz fell from $6 (June 2020 peak) to under a dollar amid waning interest and eventual delisting from the NYSE in 2020. However, the stock climbed back to over $6 when the company emerged from bankruptcy via auction, rewarding shareholders who stayed.

He noted that while most will fail or at least "dramatically underperform," "somewhere in this barrage of moonshots there will almost certainly be a few huge winners that leverage disruptive technology."