- Retail investors have been piling into certain stocks — pushing the prices higher — that hedge funds were counting on going lower.
- GameStop's stock was down 56% by late morning on Thursday, after closing above $347 on Wednesday.
- Getting out of a stock at the price you want can be tricky when it's dropping.
While it's uncertain where those stocks will go from here in the short term, experts say investors should be prepared for them to fall back down to Earth at some point. On Thursday, GameStop's stock was down 56% by late morning, after closing at $347.51 on Wednesday. A week ago or so, its price was about $42, and at the start of 2021, it was $18.84.
"If you were lucky enough to have been in on the ride up, having an exit strategy is critical," said certified financial planner Doug Boneparth, president of Bone Fide Wealth in New York.
"It's not about what you made on paper, it's about what you actually keep in your account," Boneparth said.
Retail investors, led by those in the WallStreetBets Reddit chat room, have been piling into stocks that hedge funds, using a strategy called short selling, were counting on going lower. Basically, short selling involves borrowing shares of a stock at a certain price, selling them and then counting on being able to buy at a lower price when it comes time to pay back the borrowed shares.
There are reasons that professional investors short certain stocks, which can include poor fundamentals and an outlook that generally doesn't suggest future growth. And in those cases, regardless of how high the stock price goes due to demand, the underlying company's financials haven't changed.
Additionally, getting out of a stock at the price you want can be tricky when it's trending downward.
"If everyone is running for the exit and you put in a market order to sell, you're going to get whatever price the market will bear," Boneparth said. "So if it's falling rapidly, there's a big question of how soon your order will be filled."
You also can put in a stop-loss order, which essentially means that if the stock falls below a certain price you set, you sell. The price you get may not be the one that triggered the sale, however.
"If you've made money, that's fantastic," Boneparth said. "But at some point, you need to remove yourself from the circus that this is."