What happened

Shares of AMC Preferred Equity (APE) burst onto the market Monday with an opening price of $6.95 per share and fluctuated wildly in value, trading between a high of $10.50 per share, a 51% gain, to a low of $5.21 per share, a 25% loss, before closing at $6 a stub, down 13% on the day.

The rest of the week has been almost as volatile with significant swings in value. APE closed out trading on Thursday at $6.70 per share, a 13.5% loss so far. But there's more to APE than just its daily price fluctuations.

Movie theater projector.

Image source: Getty Images.

So what

The preferred shares were issued by AMC Entertainment (AMC -5.36%) as a means of allowing the movie theater operator to raise more cash in the future. Although CEO Adam Aron has said dilution isn't in the cards just yet, he's also made it known that the preferred equity units were intended to get around the limitations AMC Entertainment faces on issuing more stock.

Because the theater owner had issued a lot of stock during the pandemic to stay afloat, it is now coming up against limits through its debt covenants on how much more it can raise. Aron sidestepped that by creating the preferred units.

It also serves the purpose of a stock accounting that AMC investors have been demanding. Under the belief that short sellers, hedge funds, dark pools, and others have created "fake" shares of stock, they've been calling on Aron to have an official counting of AMC stock to prove the total number. Aron himself has said he's seen no indication of these so-called synthetic shares, but since the new preferred stock would be issued to AMC investors just like a stock split, it would serve the same function.

Now that the stock has been issued, there doesn't seem to be the mass fake stock count that was alleged. Though a number of investors cling to the idea that some shares have yet to be delivered to accounts in certain quarters, the synthetic shares will still be discovered, and the MOASS (mother of all short squeezes) will commence.

Now what

When AMC Preferred was issued, AMC Entertainment's common shares plunged. That's because it was, as noted, akin to a type of stock split. So you would need to add together the price of the common and preferred shares to get a sense of how the theater owner's shares were doing.

AMC closed at $18.02 per share last Friday and began trading Monday at $11.33 per share and closed at $10.46 per share. Adding in APE's $6 per share close that day had it down 8.6% for the day, and it's down 9% for the week so far.

Although further dilution of shareholders has been the reason for the creation of the preferred shares, many investors are still leery about seeing their movie theater stock get thinned further. But with the APE shares having priority in a bankruptcy over the common shares, the preferred shares may become more attractive to investors.