Here is Thomas Peterffy's warning to investors betting against so-called meme stocks like AMC Entertainment.
"It is extremely tempting to short these stocks, but unless you have huge liquid resources, please try to resist the temptation because these prices can go to unimaginable highs before they settle down to a reasonable valuation, and you may have to cover on the high point," the online brokerage pioneer said in an interview on CNBC'sShares of AMC soared more than 20% on Monday after rising 83% last week alone despite declines on Thursday and Friday.
"On the long term, stocks always approach their fundamental values, which in this case is much, much lower," Peterffy said, acknowledging that's why short-sellers see an opportunity in certain stocks such as AMC that have soared in price after becoming favored by Reddit traders. Shorting a stock is a bearish strategy in which an investor borrows shares and then promptly sell them, expecting the price to fall. When that happens, the short-seller buys back the stock at its lower level and returns the borrowed number of shares, profiting off the difference. If the opposite transpires, a short may try to limit their losses by buying back the stock at higher prices.
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