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How to trade meme stocks now: know when to sell before you buy


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A image of a AMC movie theater in Times Square, New York.
Meme stock prices are crashing, should traders abandon ship?- Photo: Getty Images

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. 

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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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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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