How Social Media Created ‘Cult Stocks’ — The Rise of Meme-Driven Investing

What Defines a Cult Stock in Today’s Market?

A cult stock in today’s market is defined as a stock whose price moves are governed by stories or hype generated around it by a community and not by proven fundamentals. Therefore, cult stocks can be said to have two components:

• a story
• a community

The story

Every cult stock has a short but powerfully addictive story. Such a story has to be captured in one or two sentences. If you need 10 pages to describe why a cult stock is the next big thing, then such a stock cannot be a cult stock. Short but powerful memes such as “this stock will be the next Facebook/Google” are enough. When the mass of the trading public, primarily uninformed traders who ride any bullish wave, recall how a comparison stock like Facebook (Meta) went from a dormitory operation to a global behemoth, the fear of missing out (FOMO) seizes them, and they jump in without research.

Community: The Role of Online Communities in Driving Stock Momentum

Think of a community as a fan base. These are not shareholders who have a genuine vested interest in a stock because of value. This is more of a fanatical, obsessed followership, usually found in online communities. They create slogans, jingles, and memes as a rallying call to themselves and to others they perceive as “still do not get it.” Any dips in price are not normal price corrections under the Dow Theory, but are a form of betrayal and an attack by outsiders trying to pull them down.
There is usually a charismatic leader…someone everyone else looks up to as a visionary hero who has come to save their world.

On the flip side, there are the villains, those who do not share the hype and actively call for people to be wary of cult stocks. To the cult stock community, such entities are enemies that need to be overcome for the project’s good.
The power of the community is in its numbers. For every post of caution against the stock on social media, there are tens of thousands (if not more) of voices ready to roar into an attacking din against such an “enemy”, with such voraciousness that some have to delete their accounts to protect themselves from the barrage of counters and even insults from the cult stock community.

How Viral Trends Turn Ordinary Companies into Meme Stocks

Every viral trend is made to attract the attention of the target audience. It is aimed at creating coordinated buying, which will lead to big moves and provide an avenue for more content that will create even more buying, turning that stock into a “meme stock.”

The content is not research notes from hedge funds or banks that detail sound fundamentals. Instead, they are posts that are typically viral on YouTube, Reddit, TikTok, or X posts or videos such as “I turned $200 into $10,000 in three weeks trading XYZ stock. Click below for details…” It could also be in the form of a rumour or a headline, or some other story that produces a nostalgic hook or is related to an item one owns that creates a deep sense of affiliation (remember DOGE and the Shiba Inu image that speaks to Elon Musk’s dog?)

The content creates emotion that spreads like wildfire. Many get onto the bandwagon, and the cycle begins. The social media algorithms show it to more people. Then the narrative becomes the talk of retail feeds. This attention is now translating into new trading accounts, new deposits, new orders, and retail traders piling in, driving the price upwards from sheer demand.

By the time screenshots emerge, fundamentals no longer matter. No one wants to see the company’s financials. It’s all about “mooning” and insane returns. As long as the narrative (the story) keeps pumping in new “dumb money” (the community), the price of the meme stock will keep trading above fair value…until it crumbles.

Psychological Triggers Behind Social Media Hype

The psychological triggers behind social media hype are:

• Fear of Missing Out or FOMO: “2,000% in three days. You miss this, you will end up regretting your whole life.” Your brain starts telling you that everyone else is hitting it big, and you are losing out big time.
• Herd mentality: Humans are social creatures and generally exhibit herd behavior. This herd behaviour also drives attitudes to meme stocks. If everyone is buying this stock, it is the next big thing.
• Tribe identity: The urge to belong is a psychological driver behind meme stock fever. The GameStop saga was a classical case of an “us versus them” scenario, pitting “us”, the retail traders, against “them”, the hedge funds.
• Revenge mentality: Statements such as “they have always made all the money….now it’s our turn” typify the revenge mentality behind meme stock patronage. Not a few celebrated the collapse of a hedge fund that took massive losses after betting against a memestock in 2021.
• Hero worship: The creators of meme-stock communities are sometimes deified and seen as objects of worship and followership. They can do no wrong in the eyes of their community members.

Risks and Rewards of Participating in Meme-Driven Rallies

Those who catch the first wave of the meme-stock rally are usually the biggest winners. Those who jump in later, driven by FOMO (Fear of Missing Out), are the ones exposed to the risk of a bubble.

No matter how much a meme stock rises, those who bought early will start to sell, and this will continue until selling outpaces new buying, leading to a downward reversal. Eventually, the latecomers will become overwhelmed by the collapsing prices and sell in panic to cut their losses.

So while there’s potential for early birds to make it big, more people will be on the late train and will be caught out when the bubble bursts.

Why Meme Stocks Continue to Influence Retail Trading Behavior

Meme stocks will continue to drive retail behaviour for a long time to come. The attitude towards meme stocks by retail traders is at the very core of human behaviour. Everyone wants more.

As long as the potential to make steep rewards of up to 1000% or more exist, and there is a narrative and a community to drive this narrative, retail traders will always be drawn to meme stocks.

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