AMC (AMC 3.29%) recently dethroned GameStop to claim the title of "King of Meme Stocks," with gut-wrenching volatility driven by interest among retail day traders, particularly those found on Reddit's WallStreetBets subreddit. The movie chain operator started the week by announcing a dilutive deal to sell 8.5 million new shares to Mudrick Capital, a hedge fund that specializes in "event-driven" investing. It immediately unloaded its entire position.

An offer for free popcorn for day traders added another $16 billion to AMC's market cap on Wednesday. AMC then detailed an at-the-market (ATM) offering to sell 11.55 million more newly issued shares into the rally on Thursday, with the stock gyrating from down 40% to up 10% before closing down 18%. AMC completed the latest ATM deal on the same day, raising $587.4 million by selling the shares at an average price of $50.85.

Person laughing in movie theater while holding a bucket of popcorn.

Image source: Getty Images.

AMC is enthusiastically embracing the attention and capitalizing on the volatility. The company has now conducted four offerings in 2021 -- three ATM programs plus the Mudrick deal -- but those capital raises come at a dilutive cost. AMC has diluted existing shareholders by 14% over the past month alone. Considering the volatility, AMC's securities lawyers were particularly thorough and cautious in warning investors about the risks they face. The risk factor legalese in the prospectus is a thing to behold.

You could lose all your money

"We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last," AMC writes (emphasis original). "Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment."

The recent price action has nothing to do with AMC's fundamental business, as the entertainment industry is still trying to recover from the COVID-19 pandemic. If you think "losing all" is an exaggeration, remember that AMC was on the verge of actual bankruptcy just a few months ago (this risk has since decreased substantially thanks to all of the capital raises).

Quite the range in 2021

"For example, during 2021 to date, the market price of our Class A common stock has fluctuated from an intra-day low of $1.91 per share on January 5, 2021 to an intra-day high on the NYSE of $72.62 on June 2, 2021 and the last reported sale price of our Class A common stock on the NYSE on June 2, 2021, was $62.55 per share," the company notes.

That's quite a trading range for just a few months!

Options and margin are contributing factors

Factors that could impact AMC's stock price include "the sentiment of retail investors (including as may be expressed on financial trading and other social media sites and online forums), the direct access by retail investors to broadly available trading platforms, the amount and status of short interest in our securities, access to margin debt, trading in options and other derivatives on our Class A common stock and any related hedging and other trading factors."

This section seems to refer to Robinhood's controversial decision in January to briefly restrict trading on meme stocks when it couldn't handle the heightened settlement requirements from clearinghouses. Additionally, WSB traders enjoy targeting stocks with high short interest in an effort to create a short squeeze while simultaneously buying out-of-the-money (OTM) weekly call options in order to trigger a gamma squeeze, which refers to buying pressure related to hedging activity from market makers.

You might buy at the top trying to create a short squeeze

Speaking of short squeezes, AMC points out that such an event could be occurring, and some bullish investors may end up buying the stock "at inflated prices unrelated to our financial performance or prospects, and may thereafter suffer substantial losses as prices decline once the level of short-covering purchases has abated."

Short squeezes tend to be temporary in nature.

Investing 101

AMC cautions that "if the market price of our Class A common stock declines, you may be unable to resell your shares at or above the price at which you acquired them."

Yes, that is how the stock market works.

Blue stock chart going down.

Image source: Getty Images.

90% of shares outstanding were issued since the start of 2020

"From January 1, 2020 through June 2, 2021, we have issued 449,307,737 shares of our Class A common stock in a combination of at-the-market sales, conversion of Class B common stock, conversion of notes, exchanges of notes, transaction fee payments, and equity grant vesting," according to AMC's timeline. "As of June 2, 2021, there were 501,780,240 shares of Class A common stock issued and outstanding."

This means that 90% of all shares that are currently outstanding were issued since the start of 2020. Note that the 501.8 million figure does not include the brand-new 11.55 million shares that hit the market on Thursday. There might be more where that came from: AMC plans to request shareholder approval at its upcoming annual meeting to authorize even more shares to be issued. That's a lot of dilution!

People lie on the internet

We have received, and may continue to receive, a high degree of media coverage that is published or otherwise disseminated by third parties, including blogs, articles, online forums, message boards and social and other media. This includes coverage that is not attributable to statements made by our directors, officers or employees. You should read carefully, evaluate and rely only on the information contained in this prospectus. ... Information provided by third parties may not be reliable or accurate and could materially impact the trading price of our Class A common stock which could cause losses to your investments.

This may refer to the volume of due diligence (DD) posts on WSB, which are often prefaced with disclaimers that the poster is not a financial advisor and/or may have an intellectual disability. Don't trust everything you read on Reddit or the internet. Instead, read the prospectus, which warns you not to invest.

Editor's note: We mistakenly published this article a day early.