Joe Moglia, former CEO of online trading platform TD Ameritrade, issued a stern warning Thursday against using leverage to try to outperform meme stocks.
“My biggest concern is what’s going on with the individual investor who uses borrowed money to trade more than they did,” Moglia told CNBC’s “Squawk Box” as AMC Entertainment stock did early on Trade slumped and fell about 30%. The stock’s annual earnings were still around 2,000% despite the sharp decline on Thursday. AMC shares nearly doubled in the previous session.
Another Reddit favorite, BlackBerry, soared Thursday before slashing those gains after closing nearly 32% in the previous session. Bed Bath & Beyond, which was also implicated in the meme stock mania, fell 25% after rising 62% on Wednesday.
“You need to understand when you use leverage what that really means. Leverage on the way up is a great thing. Leverage your way down can knock your arms off, ”added Moglia, currently chairman of Capital Wealth Advisors.
AMC’s wild swings began Thursday after the cinema chain “from time to time” sold 11.55 million shares. As a disclosure, the company said, “We caution you not to invest in our Class A common stock unless you are willing to take the risk of losing all or a significant portion of your investment.”
AMC announced in a securities filing on Tuesday that it raised $ 230.5 million through a stock sale to depressed debtor firm Mudrick Capital Management, which reportedly sold these new AMC shares immediately for a profit.
Given the meme stock prices and headlines about how fast businesses’ businesses are doing, brokers – especially those targeting individual investors – need to better educate their clients about the risks of a seemingly easy way to make money and when to sell, Moglia said .
“For example, if you bought AMC for $ 10 and it goes up to $ 20, isn’t that enough profit? If it goes up to $ 30, $ 40, at what point do you start doing it Trimming or actually getting rid of position? We need to do a better job with the day traders, “he added.
Disclosure: The $ 22 billion merger of Charles Schwab and TD Ameritrade was completed in October 2020.