Hedge funds have been losing a lot of money shorting meme stocks in 2021. In addition to the $2 billion they lost shorting GameStop (NYSE:GME), they’re now getting rolled on AMC Entertainment Holdings (NYSE:AMC).
According to a Reuters report, short-sellers have lost $512 million on AMC stock so far. The report does not say that hedge funds are the majority of those short, but it appears likely given two facts:
Why shorting is so risky Shorting in general is risky, because the potential losses are unlimited. To short a stock, you
Meme stocks in particular are even riskier If shorting stocks is risky, shorting meme stocks is even riskier. That’s because these stocks’ prices don’t follow their fundamentals, and, therefore, it’s quite possible for them to go up, even when they look like they “should” go down.
As an example, let’s consider BlackBerry (TSX:BB)(NYSE:BB). BlackBerry is a Canadian technology stock that got taken up by Reddit, just like AMC and GME. In its most recent fiscal year, BlackBerry saw its
- Revenue decline;
- Earnings come in at -$0.56 per share; and
- Gross margin decline.
Foolish takeaway As the events of 2021 have shown, shorting stocks is very risky. Whenever you short a stock, you run the risk of unlimited losses. If you short a meme stock, that risk is even greater, because these stocks have the potential to rise dramatically in a short period of time. Overall, it’s best to not short meme stocks. No matter how good your analysis is, WSB’s 10 million members have more buying power than you do.
The post WARNING: You Should NEVER Short Meme Stocks! appeared first on The Motley Fool Canada.
Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends BlackBerry.