What Is A  Short Squeeze?

A short squeeze is a market event in which short sellers quickly close out bearish positions in a stock, leading to a dramatic surge in the share price.

Here’s a deeper dive in to how short squeezes occur and what investors should know about them.

What Is Short Selling?

Let’s say you borrow a stock trading at $10 and pay it back in 90 days. 90 days later, the stock trades at $5. You buy back and return the shares, making $5 profit a share.

What Is A Short Squeeze?

Let’s say the investor borrows the $10 stock again. This time however, the share price shoots up to $15 in 90 days. The investor still has to buy the shares and return them.

What Is A Short Squeeze?

Other investors are also covering their short, so there’s a shortage of shares. That causes the stock price to jump. To $20, $30, or $40. The spike in price is a short squeeze.

One famous example of a short squeeze in 2021 was video-game retailer GameStop, which jumped 2,300% in a few weeks as many investors wanted to profit off the high number short sellers in the stock. 

How To Trade A Short Squeeze

To invest in a short squeeze, look for stocks that have many short sellers. Traders know that short sellers will have to buy back share – at any price – to return them.

Risks of A  Short Squeeze

While short squeeze investments can produce eye-popping returns in the short term, they come with real risks. These risks are:

Risk 1: Stocks with a high short-interest number may be undervalued or misunderstood, or they may simply be a failing businesses.

Risks of A  Short Squeeze

Risk 2: The price increases caused by short squeezes are short-lived. And the share prices often fall as quickly as they rose.

Risks of A  Short Squeeze