What Exactly Is a Short Squeeze?

At one point, more than 100% of GameStop’s float was sold short – an excessively high number meaning that every share available was borrowed at least once to be sold short, but some were borrowed multiple times. The kindling needed to start a short squeeze is a stock for which many investors hold short positions. Before you can understand short squeezes, you have to understand how short selling works. Short selling is an advanced trading strategy involving potentially unlimited risks, and must be done in a margin account. For more information please refer to your account agreement and the Margin Risk Disclosure Statement.

  1. All fixed income securities are subject to price change and availability, and yield is subject to change.
  2. Moreover, it is important to set realistic expectations and avoid excessive risk-taking.
  3. A short squeeze involves a rush of buying activity among short sellers due to an increase in the price of a security.

A business can face a profit squeeze when its profit margins have decreased or are decreasing. This type of squeeze happens when a company’s revenue declines or its costs rise and it is unable to raise prices accordingly. The underlying causes of a profit squeeze are numerous but commonly consist of increased competition, changing governmental regulations, and expanding producer and supplier power.

For purposes of this section, Bonds exclude treasury securities held in treasury accounts with Jiko Securities, Inc. as explained under the “ Treasury Accounts” section. The value of Bonds fluctuate and any investments sold prior to maturity may result in gain or loss of principal. In general, when interest rates go up, Bond prices typically drop, and vice versa. Bonds with higher yields or offered by issuers with lower credit ratings generally carry a higher degree of risk. All fixed income securities are subject to price change and availability, and yield is subject to change.

This scarcity of shares, combined with the sudden realization that there were more short positions than actual stock available, pushed the price of Volkswagen stock to astronomical levels. The short sellers were left scrambling to buy back shares at any price to cover their positions, exacerbating the upward pressure on the stock. A short squeeze involves a rush of buying activity among short sellers due to an increase in the price of a security. The increase in the security price causes short sellers to buy it back to close out their short positions and book their losses. As mentioned earlier, short interest is the total amount of outstanding shares that haven’t been closed by short sellers.

As previous short sellers enter buy orders to close out their positions, it adds fuel to the buying fire, attracting more buyers and pushing the stock’s price even higher. Suppose that Company C was borrowed on margin by a trader who then sold 1short 00 shares at $25. Several days later, Company C’s stock price plummets to $5 per share, prompting the trader to buy it back. However, if the stock price increases, the short seller is still liable for the price of the stock when it is sold.

Conversely, short covering involves buying back a security to close out an open short position. The stock’s momentum built on itself, and by the end of the month the stock had soared to more than $120 intraday – up some 60 times in price from just months before. Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.

When many short sellers attempt to buy back simultaneously, there is no cap on how high stock prices may rise. This often gives rise to opportunistic investors trying to capitalize on the short squeeze by buying during the price ascension. A short squeeze is bad news for short sellers and good news for investors going long. The “squeeze” forces short sellers to buy, raising the price of the stock, which causes them to lose money. As more short sellers exit, the price goes higher causing short sellers to lose more and buyers to gain more. All investments involve the risk of loss and the past performance of a security or a financial product does not guarantee future results or returns.

Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns). There are no guarantees that working with an adviser will yield positive returns. The existence of a fiduciary duty does not prevent the rise of potential conflicts https://bigbostrade.com/ of interest. Short squeezes only happen when a lot of traders have shorted the same stock. Even in a best-case scenario, a short squeeze is a quick occurrence — not a long-term strategy. Buying into a company in the hope of lassoing a rocketing price is speculative at best.

Naked Short Selling vs. Short Squeeze

To understand the real-life impact, consider the instance of the GameStop short squeeze in January 2021. The stock price swiftly escalated from roughly $20 to over $480 in mere days due to collective action by a group of retail investors on Reddit, causing monumental market fluctuations. One of the most notable short squeezes in recent history centers on the stock of European automaker Volkswagen (VWAGY 1.69%).

Targets for short squeezes

To profit, the short seller will borrow the stock from their brokerage to sell and then purchase the stock back later at a lower price. If all goes as planned, the difference between what the short seller sold the stock for and the amount that they bought it back for becomes their profit. If the short seller’s prediction is wrong, and the stock’s value increases, it forces them to buy the stock back at a higher price from which it was sold, and pay for the difference. In simpler terms, just remember that short selling is a way for short sellers to make a quick profit by borrowing a stock or security to sell and then buying it back to possibly profit and return the stock. A short squeeze can seemingly happen suddenly with price rising parabolically. But often short squeezes are fueled by unusually high short interest in the underlying security.

Running Out of Money in Retirement: What’s the Risk?

Several types of squeezes—including profit squeezes, credit squeezes, short squeezes, long squeezes, and bear squeezes—are explained below. Squeeze situations are often accompanied by feedback loops that can make a bad situation worse due to market psychology. Watching short interest can tell you whether investor sentiment about a company is changing.


While high-profile squeezes get a lot of press when they occur, many stocks experience short-lived squeezes throughout a typical year as longs and shorts battle back and forth. Bankrate follows a strict
editorial policy, so you can trust that our content is honest and accurate. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.

Understanding the Difference Between a Short Squeeze and Short Covering

Speculators and traders who have short positions in a stock will face heavy losses if the stock undergoes a short squeeze. Contrarian investors who have built up long positions in the stock in anticipation of a short squeeze will benefit as the stock price climbs. Investing services in treasury accounts offering 6 month US Treasury Bills on the Public platform are through Jiko Securities, Inc. (“JSI”), pips trading a registered broker-dealer and member of FINRA & SIPC. JSI uses funds from your Treasury Account to purchase T-bills in increments of $100 “par value” (the T-bill’s value at maturity). The value of T-bills fluctuate and investors may receive more or less than their original investments if sold prior to maturity. T-bills are subject to price change and availability – yield is subject to change.

Tactics like setting stop-loss orders, which essentially instruct a broker to sell a stock once it reaches a certain value or maintaining a diversified portfolio can help mitigate risks. Proactively staying informed can also shield investors from the risks of short selling and possibly leverage market volatility to their benefit. Transitioning from how a short squeeze operates to understanding its implications, it’s noticeable that short squeezes can lead to considerable price swings. This is very important to anyone who has a vested interest in the stock as they could lose or gain significantly from the situation. These fluctuations don’t only affect the specific stock but the broader market indices as well, potentially attracting regulatory attention. You have a lot of short sellers, all of whom have borrowed shares and all of whom must eventually pay them back.






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