At a glance:

• Meme stocks are shares of companies that have seen a recent, unusual uptick in activity.

• Social media has stirred up interest in investing, particularly among young investors.

• Vanguard encourages investors to keep meme stocks in perspective.

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.

What's a meme stock?

A meme is defined as an idea, behaviour, 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.

The difference

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.

Social media: The new school

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 in the U.S. aged 18–34 learned how to invest from social media research, compared with only 3% of investors aged 35–64 and 1% of investors aged 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 behaviour often drives popular trends like meme stocks.

Vanguard's take

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 encourage you to visit our education centre to learn more about investing and find the right investments for your portfolio.

Smart Investing, Robin Bowerman