This is most likely a question many ‘meme stock’ investors have plagued themselves with, maybe even contemplating as to why they bought into the hype in the first place in the past few weeks as AMC (NYSE: AMC) stock ran out of fuel.
This is a very common mistake among new investors who are not experienced or knowledgeable in a volatile environment like the stock market. Just in case you’re aren’t sure what to think about this recent run-up and decline, let’s break down what happened and what’s next for AMC stock.
After all, it’s quite a lot to decipher.
Retail investors on the social media platform Reddit, gathered to invest in AMC to knock out hedge funds who were shorting the stock.
Shorting or formally known as short selling is essentially when a bet is placed that the shares will go down over some time, and in return, the investor is hopeful of making money by selling shares at market price and buying them back at a lower price. Since Reddit investors were buying the stock, a short squeeze emerged which forced hedge funds to cover their positions and short it even more.
This caused a massive rally which sent the stock flying, which inevitably crashed and burned over 40% at the time of writing. All of these events unfolded fairly quickly but became mainstream and influenced many others to join in on the Reddit-fueled rallies.
Although the world is beginning to open up again, people are returning to theatres, and revenues are coming back. Although, the theatre industry as a whole is being disrupted.
Netflix, Disney+, and other streaming services accelerated at a record pace in 2020 compared to movie theatres that had to close. The simplicity of being able to stream your favourite movies and shows in an instant is becoming more appealing to a broader audience.
Although this isn’t to say cinema is completely dead, it’ll most likely always be around, It just won’t be as prominent as streaming. Despite this, AMC’s stock remains fairly high compared to its original share price before the shutdowns.
Because of the AMC stock rally, it’s become clear that the stock does not move based on fundamentals but rather the hype around it during any moment in time.
Retail investors can now influence stock prices greatly, this has not only been shown in AMC but also in GameStop and BlackBerry. We didn’t previously think this was possible because of the capital which hedge funds have at their disposal.
AMC stock is extremely volatile, and its fundamentals are definitely far from being in touch with reality, yet some investors still pile into it. This needs to be noted by everyone as extremely risky and not sensible investing behaviour.
While trying to beat hedge funds at their own game seemed smart at the time, it was inevitable profits would have been pulled, and hedge funds would have won. This is what we are currently seeing right now.
It’s best to be sensible and make investments based on the fundamentals, outlooks, and trajectory of a business, and not how hyped up it is.
This will be a lesson learned for many new investors which they can hopefully use as motivation to learn the true power of investing which has led investment legends to success.