So why do some stocks go from being unloved on Wall Street to being stalwart favorites of the Reddit military?
What all of these stocks have in common is that a good number of short sellers bet against them.
And it pisses the passions of the Reddit crowd, many of whom consider short selling – when an investor borrows a stock and sells it in the hopes of buying it back at a lower price and pocketing the difference as profit – like a rigged piece of the investment game designed for the benefit of fat cat hedge funds.
“Root out” the life of hedge funds
The term “meme stock” can sometimes be used derogatoryly, but the point is that investors on Reddit are sophisticated enough to realize that by targeting stocks that are heavily shorted and do not have a significant amount of money. ‘stocks available for trading, there is a chance to help fuel what is called a short squeeze.
A tightening occurs when short sellers have to rush to buy back the stocks they have borrowed because the price goes up.
The higher a stock is, the more money the short seller is likely to lose. So they often have to buy back the stock quickly to avoid losing their shirts, which pushes the price up even higher.
If a short seller borrows a stock that is trading at $ 50 and sells it, but the stock then climbs to $ 75, that’s a loss of $ 25. If it goes to $ 100, the shorts are $ 50 in the red, and so on. They want to get out quickly to cut their losses, and that creates the squeeze.
Of course, AMC is not a “safe” stock per se. Many things can go wrong with the reopening of the economy. And while things go well, some argue that stocks, which have already risen more than 2,000% in 2021, could eventually cool down.
Planet of the Apes’
Reddit’s crowd support is also drawing the attention of memes action management teams.
“I’m quite optimistic about AMC’s new shareholder base,” AMC CEO Adam Aron said in his earnings call last month. “Go to Twitter, go to Reddit, just go to YouTube. Read what these people are writing. They love AMC.”
“These are not people who are just going to be investors in AMC. They will be AMC customers who will come to our theaters and enjoy watching movies in our theaters as paying guests,” he said. added. “So I like the idea that we have a base of passionate, engaged and enthusiastic shareholders.”
So it seems the key to finding a stock that’s ready for a Reddit bump is identifying companies that don’t have a lot of stocks available for trading. It’s easy to propel those stocks higher.