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 is wrong 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 as much as 30%. In the afternoon, stocks turned positive before falling again, closing nearly 18%.
The stock’s annual earnings were more than 2,300% despite the previous sharp decline on Thursday. AMC shares nearly doubled in the previous session.
Another Reddit favorite, BlackBerry, soared Thursday before lowering those gains after closing nearly 32% in the previous session. In the afternoon, stocks returned to positive territory and ended the day up 4.1%.
Bed Bath & Beyond, also embroiled in the meme stock mania, closed 27.8% on Thursday. On Wednesday it rose 62%.
“You need to understand when you 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.”
On Thursday afternoon, the cinema operator announced that it had completed the stock offering and raised $ 587.4 million.
AMC announced in a securities filing Tuesday that it raised $ 230.5 million through a stock sale to depressed debt firm Mudrick Capital Management, which reportedly sold those new AMC stocks 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 merger of Charles Schwab and TD Ameritrade was completed in October 2020.