A shorted stock is a stock which is borrowed from a broker and then sold, with the seller banking on buying it back later for a lower price. However,The meme stock community can build considerable clout around a share through online conversation on sites like Facebook, Twitter and Reddit. This can sometimes lead to an overvaluation of the stock as communities attempt to drive up the price of normally shorted shares.
The name is lent to this particular kind of stock as the shares earning the title have been chosen and widely discussed in online communities. The first meme stock is largely considered to be struggling gaming company GameStop, which in early 2021 rose sharply in price as members of the sub-thread"r/wallstreetbets" on Reddit orchestrated a massive"short-squeeze.
A short squeeze is when a shorted stock's shares rise sharply in price and buyers close out to avoid losing big. In the case of GameStop members of"r/wallstreetbets" bought up shares with fervor, knowing hedge fund managers counted on it as a shorted stock, eventually driving up the price from $2.75 per share to $500 a share.
As a result, short sellers were forced to choose between buying the stocks back at increased prices or waiting out a fall in price. The resulting millions lost by marquee-name banks and hedge funds immediately drew scrutiny to the phenomenon of meme stock trading.
Here's a simple explanation of a meme stock:
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