Who Buys Meme Stocks?

“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.”
—William Feather

Source: Federal Reserve Bank of St. Louis
By Mary Clare Peate , Cameron Tucker
Photo: Courtesy Wikipedia

Meme stocks are a relatively new concept in investing. In this article, you’ll learn how the demand for these stocks differs from the demand for traditional stocks and how changes in financial technology have allowed new investors to enter and affect the stock market.

Introduction

GameStop is a video game retail company that is listed as GME on the New York Stock Exchange. In January 2021, its stock price, trade volume, and trade dollar value increased dramatically after receiving a great deal of social media attention. Given this unusual type of trading activity, GameStop was deemed one of the first “meme stocks.”

Figure 1: GameStop Stock Closing Prices, Jan 2021 A line graph shows that GameStop stock prices in January 2021 remained consistently below $100 before increasing significantly starting January 25. By January 27 it reached about $350, falling to $200 one day later before again increasing to around $325 by month’s end.

^{SOURCE: MIDAS Vendor-Supplied Closing Prices; reprinted from the Securities and Exchange Commission’s Staff Report on Equity and Options Market Structure Conditions in Early 2021.}

Figure 1 above shows the closing prices of GameStop shares throughout January 2021. Why did GameStop’s stock price change so much over such a short time period? While a complete answer to this question is very complex and outside the scope of this discussion, the article will summarize common reasons why the price of a stock changes and how a meme stock seems to differ.

Changes in the Price and Demand for Stocks

A stock is a share of ownership in a company. People often purchase stock shares that they believe will go up in price. In other words, they believe the long-term value of the company will increase over time. Purchasing stocks or bundles of stocks is a form of investment for many people.

Stock prices should change over time to reflect the value of the company, but ultimately the price of a company’s stock is determined by the laws of supply and demand. If more people are trying to buy a company’s stock, the price of that stock is going to increase. Vice versa, if fewer people are trying to purchase a company’s stock, the price of that stock is going to decrease. The supply of a stock also affects the stock price, but this is not as large a factor because changes in the supply of a stock happen much less frequently.

There are several different ways investors try to gauge the value of the company, but two main factors that affect demand for a company’s stock are new information about a company and changes in underlying economic or market conditions. Some examples of new information include a company’s quarterly earnings or an announcement of the company’s change in leadership. Some examples of changes in general market conditions include changes in interest rates or news about a sector or the overall economy. Anticipated changes can also affect a stock’s current demand.

Demand for Meme Stocks

A meme stock is like any other stock in that it, too, is governed by the laws of supply and demand. However, unlike traditional stocks, demand for a meme stock, and therefore its share price, does not seem to be primarily driven by new information about the company or general economic or market conditions.

In the case of GameStop, the strongest indicator of demand for its stock in January 2021 was social media posts about GameStop. Figure 2 below, from The Federal Reserve’s Financial Stability Report from 2021 (PDF), indicates a strong positive relationship between the price of GameStop stock and social media posts about GameStop from December 2020 to February 2021. The report also notes that there was a higher number of social media posts regarding GameStop on days with higher trading volume and on days with higher volatility in price.

Figure 2: GameStop Stock Price and Twitter Mentions of GameStop, Dec 2020-Feb 2021 A bar graph shows that tweets about GameStop were steadily below 500 per day for December 2020 to early January 2021. That number peaked at more than 2,000 per day by mid-January before falling to below 500 in early February. A superimposed graph line shows that GameStop stock prices increased when there were more tweets per day, and they decreased when there were fewer tweets per day.

^{SOURCE: Twitter, Inc. and Bloomberg; reprinted from the November 2021 Financial Stability Report by the Board of Governors of the Federal Reserve System.}

Who Demands Meme Stocks?

The correlation between social media posts and GameStop’s stock price can in part be explained by the fact that a different set of individual investors were interested in this meme stock. Social media has changed the way investors communicate about meme stocks, and new financial technologies have decreased the barriers for people to invest in the stock market.

Figure 3 below, from the Securities and Exchange Commission’s (SEC) October 2021 report (PDF) examining the GameStop events, notes that the number of unique individual investors trading GameStop stock dramatically increased in January 2021. Marie Briere of the Amundi Investment Institute reported that, during this same time period, roughly 22% of stock market trading volume in the U.S. was by individuals, also called “retail” investors, up from 10% in 2010.

Figure 3: Daily Count of Unique Individual, Institutional, and Other Traders of GameStop Stock, Jan 2021 A bar graph shows that the number of unique individual accounts trading GameStop stock was consistently below 100,000 for most of January 2021. It increased to almost 400,000 on January 25 and to around 800,000 January 27. These numbers are significantly higher than numbers for institutional and other traders during this period.

^{SOURCE: Consolidated Audit Trail; reprinted from the Securities and Exchange Commission’s Staff Report on Equity and Options Market Structure Conditions in Early 2021.}

Hasso et al. (2022) compared traders at one brokerage firm and found that those who bought GameStop stock in January 2021 were more likely to be male, younger, and willing to place more lottery-like trades than those who did not purchase this stock. During this same time, many first-time, young traders were investing via relatively new mobile trading apps that have lowered some of the traditional barriers to investing. Investing is easier to do when it can be done from a phone. Many of these trading apps also eliminated commissions charged to the individual trader when executing a trade, and they lowered or eliminated the minimum account balance usually required by traditional brokerage firms. Additionally, many began to allow fractional stock purchases, which means that individual investors no longer needed to buy an entire share of a company’s stock.

These changes lowered transaction costs of and increased access to investing in the stock market. Not surprisingly, younger and first-time investors make up a large share of traders on these mobile trading apps. For example, in that same 2021 SEC report, one of the prominent mobile trading apps reported that the average age of their customer was 31 and the median account balance was $240. This is in stark contrast with previous research on the typical profile of a retail investor. For example, in a 2022 S&P Global report, Schwab reported that the average age of the pre-pandemic investor was 48 years old, and other research (PDF) has estimated significantly higher average account balances for the more-traditional retail investor.

Conclusion

In summary, people base their investment decisions on various factors, including what they believe the future value of a company will be. Meme stocks are a relatively new concept and are popular with younger investors. Demand for meme stocks seems to be driven in part by factors beyond new information about a company’s performance or general market conditions, such as social media interest in the stock. Social media provided a platform for investors to discuss their investments, and more people have been able to invest due to the introduction of low-fee and no-fee mobile trading apps and other financial technology innovations. This has allowed more individual and younger investors to enter the market, and some of these new investors are showing interest in meme stocks.

About the Authors

Mary Clare Peate: Mary Clare Peate is a data strategist at the St. Louis Fed.

Cameron Tucker: Cameron Tucker is an economic education analyst at the St. Louis Fed.

Article posted by:

Levi Gwaltney

Levi Gwaltney is the Editor In Chief of Las Cruces Digest. The Editor makes editorial and posting decisions regarding content published on this site. In most cases, the Editor makes little if any contribution to content published, and takes no credit for the content of republished posts. If available, the source or author of posts is provided at the top of the article.