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 is using borrowed money to trade more than they did,” Moglia told CNBC’s “Squawk Box” when AMC Entertainment stocks early on Trades lashed and shortly after opening on the Wall Street fell about 30%.
AMC almost doubled in the previous session. Its year-to-date gain is around 2,200% today, despite the sharp drop on Thursday.
Another Reddit favorite, BlackBerry, rose about 13% on Thursday 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 be able to understand, if you are using leverage, what it really means. Leverage on the way up is a great thing. Leverage on the way down can tear 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, AMC 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 substantial portion of your investment.”
AMC announced in a securities filing Tuesday that it raised $ 230.5 million through a stock sale to depressed debtor firm Mudrick Capital Management, which reportedly sold those new AMC shares immediately for a profit.
Given meme stock prices and headlines about how fast 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 comes down to $ 30 or $ 40, then when do you start trimming that position or getting rid of it effectively? We have to do a better job with the day traders, “he added.
Disclosure: The $ 22 billion Charles Schwab-TD Ameritrade merger completed in October 2020