Does India have its Share of ‘MEME Stocks?
In the wake of the global pandemic we saw one of the fastest market crashes and also one of the most rapid recoveries in stock prices. Come 2021 we saw the emergence of the so-called ‘meme stocks’. What are these ‘meme stocks’ and do we have such stocks in India? Geyatee Deshpande shares some interesting observations on the subject while also clarifying the concepts related to meme stocks
When we look at the markets in the past couple of years, one thing is for sure – the markets have been different this time around! Different in what sense, one may ask. The markets have always been volatile and seen their course of highs and lows as also manipulation by some unethical traders with influence in the past. Clearly the story has been different since the markets bottomed in March 2020 in the sense that if you have to understand market behaviour you will have to divide the equity markets into two separate compartments. One compartment belongs to the retail investors and traders who probably opened investment accounts for the first time in their lives and started investing their monies by relentlessly ignoring the market levels and quintessential valuations altogether.
The second compartment comprises the regular professional investors and investors who have been in the markets for over a decade and understand value investing and momentum investing with a perspective that is more textbook-oriented. Institutional investors are used to looking at historical averages and conducting ratio analysis, industry analysis and then speculate the growth numbers after discussing at length with the management of the company they want to invest in. Then there is industry analysis and of course there is macroeconomic analysis or simply put, economic analysis to identify which global markets might be more rewarding.
The markets have been totally different in terms of promise, perspective, risk, reward and potential for both these camps of investors. And this very crude difference in the way markets are looked at and invested in by these two distinct types of investors is what has made the market scenario more adventurous since March 2020 than it has probably ever been in the history of the equity markets. Please remember we are not even talking about crypto currencies yet. We are talking about well-regulated listed companies and the adventure they have provided in terms of volatility in the past 15 odd months – also popularly known as ‘meme stocks’.
A meme stock is exactly what has triggered market hype, leading to increased participation in the markets. Not only did the meme stocks lead to higher participation but these popular meme stocks managed to pull together huge masses of investors all around the world, rallied them around and pushed them to make similar kinds of investment decisions – a ‘copy paste’ investment philosophy and investment action, to put it in a rather simple way. The end result of this huge phenomenon of meme stock was ‘billions of dollars of wealth creation’ in a matter of days followed by astronomical levels of wealth destruction – again just in a matter of a few days.
Defining a Meme Stock
Meme stock often pronounced as ‘meem’, ‘mehm’ or ‘me-me’ is a stock that has seen frenzied buying by investors, often influenced by its popularity in social media. The increasing influence of social media in every walk of life has ensured that the stock market is also a part of this phenomenon where the social media trends determine what is right and wrong. One of the most interesting aspects of these popular meme stocks is the people or investors who invest in them. It is observed that some of these meme investors are investing in these stocks because they genuinely believe in the prospects of the underlying meme stock while most of them are doing it because they want to prove something.
There is also another group of investors who want to make a lot of money and this group of investors believe that they can ride a wave. What differentiates the professional investors from this new breed of meme investors is the fact that the professional investors know what they are doing and they understand the risk of doing so. One serious look at Reddit and other platforms like Robinhood where the majority of these meme stock investors are hooked on and you will know that meme investors have no clue of what they are doing.
What drives the price of a meme stock?
The ‘fear of missing out’ (FOMO) is the main driver of the major increase in the price of meme stocks. The term FOMO was created by Patrick J. McGinnis in 2004 and used by the heavily internet-connected millennials or Gen Y. The fear is led by the fact that many investors are bombarded with social media updates or activities to the point where individuals or investors feel like they are ‘missing out’ if they do not actively participate in the social media conversations or activities around them.
What are some of the recent meme stocks?
The term ‘meme stock’ gathered pace in January this year when Game Stop, a US-listed gaming company, saw a huge price increase of over 19 times from a level of USD 18 in early January to USD 347 later that month. The stock experienced a crash from these levels and was seen trading at USD 44 in late February. Another recent example is AMC Entertainment, which was trading at USD 12 in late May and is now trading at USD 55. Clover Health is another meme stock that appears to be in the early stages of a major price increase. While it was trading at around USD 7 in the middle of May, it skyrocketed to USD 22 in early June before settling at around USD 13 as of the last close.
Meme Stocks in India
Thankfully, this activity of frenzied buying is seen mostly in the US markets and in some other parts of the world but not much in Indian markets. One cannot deny that there are signs of increasing delivery of investment ideas and suggestions on Twitter, Quora, Facebook and Instagram platforms of the world, but India has yet to see its ‘meme stock’ moment. Maybe India will not experience it the way US markets do because of the strict regulations imposed by SEBI and the sound risk management of stock exchanges like the BSE. We have circuit filters for highly volatile stocks and the practice of circuit filters has been implemented successfully to not only protect the investors’ interest but also to curb excess volatility.
If you have been tracking the stock markets in India and feel that stock exchanges and SEBI are not doing enough to curb excess volatility which can expose retail investors, we have something called additional surveillance measure (ASM). This is a surveillance method in which exchanges impose trading curbs on excessively volatile stocks in the Indian market. Any stock with suspicious or excessive stock price movement can enter the list of ASM – there are special exemptions granted by the exchanges to PSU stocks, securities that fall in the future and options segment and to the stocks that are already in the graded surveillance measure (GSM) ‘trade-to-trade’ segment.
What such curbs can do is discourage speculators and intraday traders from taking heavy positions in stocks. If you look at the sudden jump of meme stocks in US markets, it is clear that it would be almost impossible to repeat such a performance in the Indian stock market no matter how bullish the prospects can become. For instance, the stock of Game Stop in the US markets jumped from USD 18 in January 2021 to USD 483 on January 27. That is more than 2,500 per cent gains in less than 22 days. That’s unthinkable in the Indian markets. The Indian investor still lives in a world where 1,000 per cent in a year’s time is a once in a life-time opportunity.
Conclusion
As of now there is no evidence to suggest that there exist meme stocks in Indian markets the way they exist in the western world, the US markets in particular. However, increasingly there are signs that we are getting closer to having our own meme stock moments. We think so because the trend of seeking advice on social media platforms is increasing day by day. With such a rapid emerging trend, there is a risk that more and more investors may start drifting towards what is more popular on Twitter, Telegram, Facebook, Instagram and Google rather than focus on the core aspects of the investing process such as valuations and earnings growth.
That said, India is blessed with a regulator that is strict in its intent and action. It is hard to imagine a business leader in India getting away without punitive actions the way Elon Musk was let go in the US after making insider comments which clearly influenced the stock prices of Tesla. The measures implemented to curb excessive speculation are top-class measures, be it circuit filters or ASM or GSM. One of the reasons why we are not experiencing meme stocks here in India yet could also be due to the humongous efforts undertaken in the form of investor awareness programmes (IAPs) by SEBI, stock exchanges in India viz. BSE and NSE, stock brokers, mutual fund companies and leading stock advisors in India.
The IAPs instil confidence in first-time investors to participate in a more correct manner after researching and independently validating the investment opportunities. Besides, one of the most important steps taken by SEBI is to curb the excess leverage abilities of individual traders. The margin requirements are now stiff and discourage those high risk traders with minimal or no capital to take position in the markets. In the US, the kind of exposure one can take in stocks and options is mindboggling. Huge leverage possibility and advent of low or zero brokerage commission aided with extremely fast and user-friendly trading platforms make one feel as if investing in the stock market was like playing a video game.
These are some of the glaring reasons why the new-age investor with little or no knowledge of the equity markets is seduced to the volatility that equity markets provide. The newbies, enticed by volatility, enter the markets hoping to create quick wealth, not factoring the prospects of losing it all or even more. The Indian equity market today stands risk-averse and resilient partly due to the scams and manipulation we have experienced in the form of Harshad Mehta, Ketan Parekh and others. Indian investors stand aware today and the discussion on social media platforms also includes qualitative aspects such as valuations and business prospects which cannot be associated with meme stock discussions.
While there may be some lost investors looking for advice on social media, the quantum of such novice investors may not be high enough to cause a stir in stock prices, yet. The penchant for penny stocks, upper circuit stocks, small-caps stocks and anything that goes up is embedded with participation in equity markets. There is always a possibility of things getting repeated in India as they did in the US markets. Investors just have to remember how much dose of social media is enough to keep portfolios profitable. When it comes to seeking advice it’s always better to take it from a SEBI-registered advisor rather than seek it on social media platforms such as Quora, Twitter and other popular platforms which millions of Indians are addicted to using.