How to trade meme stocks now: know when to sell before you buy
By Jenny McCall
Updated
A US college student caused a meme stock frenzy this week after he purchased almost 5 million shares in Bed Bath & Beyond (BBBY) in July for less than $5.50 and saw the struggling furniture group's price surge: this week alone, BBBY’s stock price has risen by 43%.
A report by the FT detailed student Jake Freeman’s success, which saw the student and his uncle, Dr Scott Freeman receive a huge windful on a $25m investment, which ultimately netted them a $110m profit in the US homeware company, as the meme stock's price increased.
BBBY is considered a meme stock and shares started to rise in the company after some intense discussions were started on social media site Reddit. By Wednesday BBBY share price had risen to $23, compared to 15 August, when the stock price was $16.
Meme stocks are fun. People love to trade them and it’s a craze that has fascinated the investment world and benefitted some retail traders. But a piece of advice you should be aware of before you start to trade them – know when to sell before you buy.
Bed Bath & Beyond (BBBY) share price chart
Expert Dr. Richard Smith, CEO of the investing tool RiskSmith, and author of the Risk Rituals Newsletter, said that if you choose to listen to investing advice on Reddit, then examine the risk.
“If you want to trade meme stocks you should look at how long you want to hold for, if you want to trade in this stock. Sure the volatility is good for you but if you are just going to buy because you think they will go up because they have a bright future that’s a different thing.”“The most important thing in any speculative bet is your position size: how much do you bet, how much risk are you taking? What do all the market wizards have in common? Well, they are all religious about risk management,” Smith added.
When it comes to meme stocks, Smith said “knowing when to sell before you buy” is key to risk management.
That advice will come in handy right now for many retail traders because Meme stocks are in trouble. From AMC Entertainment Holdings Inc (AMC) to GameStop (GME) the story is the same. AMC reported promising earnings this week, sending its stock price up – but then it collapsed shortly after. So, as meme stock prices slide, how should traders approach them?
AMC stock is down over 50% year-to-date; GameStop (GME) has plunged over 30% and Blackberry (BB) has fallen over 40%. Whats more, a report by Morgan Stanley has shown that retail traders who entered the market for the first time in 2020 have been hit the hardest by the recent downturn in stocks, having on average lost all the gains they made when the markets were at its highest point.
So, the advice from Smith on knowing when to sell before you buy rings true for those who have recently lost profit.
What is your sentiment on AMC?
AMC Entertainment (AMC) stock price
Rise of meme stocks
The rise of meme stocks came from the GameStop (GME) stocks run, which was made popular by Reddit forum Wall Street Bets. As this forum is on Reddit, it is populated with irony and a large dose of memes.
The Wall Street Bets group gave rise to the meme stocks movement among retail traders, who felt that the rules of the markets were stacked against them, and that it favoured the likes of hedge funds and more institutional investors.
As a result of these investment forums, meme stocks saw their share prices surge during the pandemic, But recently this has come to a crashing halt, raising fresh questions about whether these companies’ fundamentals are a strong enough argument to support their stock prices.
GameStop (GME) stock price
The struggle is real
So why are some meme stocks struggling right now?
“Meme stocks are struggling because cashflows have come back into being appreciated and meme stocks don’t have them,” Smith says. “People are reaching for value and something more solid and meme stocks are the antithesis of solid – its memes, it’s not cashflows or a business, it’s a meme. The whole idea of a meme stock is a real absurdity.”
There are those that agree with Smith and are sceptical about meme stocks and believe that it is in fact time to abandon ship. GameStop (GME) short seller and investment firm, Bronte Capital, is cautions about the ability of retail investors to trade options contracts, compared to professional corporate traders, who have large amounts of capital at their disposal.
BlackBerry(BB) stock price
Buy low or abandon ship
So are meme stocks undervalued or overvalued right now? Smith says it’s an absurd question
“It’s not low, it’s low relative to its high, but that’s anchoring bias. It’s still up 400% or 500%. It’s all about your frame of reference and when you are anchoring on an old high and you’re saying it’s low because its 80% below that high – that’s a framing mistake. We frame our judgements based on arbitrary events,” Smith said.
The meme stock boom is either a bubble or it could signal a fundamental change in how the stock market works. Nevertheless, if retail traders want to trade in these stocks they have to be aware of the risks and know when to sell – before they even buy.
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