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AMC Entertainment stock continued its wild ride on Wednesday, with the price per share rising more than 100% and suspending trading multiple times.
AMC is one of several so-called meme stocks that, along with names like GameStop and BlackBerry, have seen strong interest from retail investors this year.
Financial advisors often warn against getting involved in such frenzies. But in a recent survey, 34% of consultants admitted their clients bought GameStop, while 20% of them bought the stock themselves, according to the Journal of Financial Planning and the Financial Planning Association.
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For retail investors, the challenge can be to place bets alongside professional investors such as short sellers, whose activity can also trigger large movements.
“Often you hear the narrative that they are only retailers, but that is not the case,” wrote JJ Kinahan, chief marketing strategist at TD Ameritrade, in a recent market update.
“The high volume suggests that there are a lot of big companies out there,” he said.
For example, the distressed investment firm Mudrick Capital bought and sold 8.5 million AMC shares on Tuesday.
Understandably, investors can get so caught up in profits that they forget to remember the potential to lose.
If you want to try your hand at meme stock names, it’s important to remember that you are really playing a game like musical chairs and behaving accordingly, according to Dan Egan, vice president of behavioral finance and investing at Betterment.
“Half of the game is figuring out how to sell before it crashes,” said Egan.
Be ready to lose money
When you pay for a ticket to a sporting event, you part with an amount of money but can still watch the game.
Investors in meme stocks should start with the same approach, Egan said.
When investing in a stock like AMC you should have some level of composure because it’s fun, and if you’re losing money that’s fine, Egan said.
Plan an exit strategy
Before or while investing in a stock, it is also beneficial to identify when you would sell it in advance.
And be sure you keep that promise, said Egan.
“What often happens to people emotionally is they hit that price point, but then they ask, ‘Wait, what if it goes higher?'” Egan said.
Anyone considering trading these should be aware of how volatile they can be.
JJ Kinahan
Chief Marketing Strategist at TD Ameritrade
To avoid this, it is beneficial to set up a way for the transaction to be carried out automatically so that your emotions are not disturbed in the moment.
“Anyone considering trading these should be aware of how volatile they can be and be prepared to be disciplined about the levels they want to get in and out of,” Kinahan said of stocks like AMC or GameStop.
Avoid a team mentality
It can be exciting to be part of an investment where your activity adds to price movement and you can empathize with fellow investors on message boards.
“The community aspect, the social aspect of it, is a really tough drug that you can try to get off of,” Egan said.
Additionally, this can prevent you from selling the stock, which would mean that you are no longer part of a team or movement.
It’s important to remember that you still need to put yourself first.
“Movement leaders won’t tell you until they sell,” Egan said.
Balance again along the way
Because of the wild swings trending stocks experience, your initial allotment could go from 5% to 20% of your portfolio while you’re not careful.
Try to rebalance if your position reaches sizes you wouldn’t have invested in, Egan said.
It’s also important to remember that stocks that have performed well will continue to fall and have more potential to lose, he said.
One way to keep making the headlines without as much risk is to put your money in investments like diversified exchange-traded funds instead, Egan said.
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