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Still, it’s important to understand that no one knows when a short squeeze will end. Meme stocks, or stocks with viral internet cultural support, have been targets of ongoing short squeezes, starting with GameStop Corp. in 2021. Movie theater company AMC Entertainment Holdings Inc. and brick-and-mortar retailers like Express and Bed Bath & Beyond have been recent short-squeeze targets since 2021. Everyone who shorted the stock between $9 and $5 is now in a losing position. Those who sold short near $5 are facing the biggest losses and will be frantically looking to get out because they are losing 80% of their investment.

XYZ’s shares jump to $9, as speculators buy the stock and short sellers scramble to cover their short positions. Short sellers make their trades expecting that the price of a stock will fall. When a heavily shorted stock unexpectedly rises in price instead, the short sellers may have to act fast to limit their losses.

Because short sellers exit their positions with buy swissquote forex broker review and ratings orders, the coincidental exit of these short sellers pushes prices higher. The combination of new buyers and panicked short sellers creates a rapid rise in price that can be stunning and unprecedented. As mentioned earlier, short interest is the total amount of outstanding shares that havent been closed by short sellers.

As history has shown, squeezes demonstrate just how sensitive financial markets can be, from the Great Depression in the 1930s to GameStop and Silicon Valley Bank in the 21st century. That makes it more expensive for businesses to borrow, sometimes prohibitively so. Here’s how a short squeeze works, how it happens and the risks of trading during a squeeze.

The GameStop squeeze

1. In business, it can be a period when borrowing is difficult or when profits decline due to increasing costs or decreasing revenues.
2. These concerns may cause banks to be more reluctant to lend out money within the interbank market.
3. Naked shorting can help exacerbate short squeezes by allowing for additional shorting that otherwise might not exist.
4. When identifying stocks at risk of a short squeeze, two useful measures are short interest and the short interest ratio.

Its important to understand the risks with any investment strategy, but most importantly, how short and long positions in stocks can be a benefit or detriment to your investment portfolio. The result was not only retail investors continued investments in GameStop stock and call options, but also a major increase in GameStops stock price in a matter of days. On January 27, 2021, GameStops share price rose to $347.21, with a brief peak of $483 per share. This squeezed out short sellers, such as major hedge funds, causing them to lose billions of dollars. The event continued to attract more notable figures like Elon Musk and venture capitalist Chamath Palihapitiya.

Protecting yourself against a short squeeze

The securities must have an extraordinary number of short sellers holding positions in them for a squeeze to happen. It is an unusual circumstance that causes the price of a security to rise quickly. Refers to when a shorted stock’s price rises and sellers choose to exit their position to avoid even more significant losses. However, in a bear squeeze, the price rises, forcing the traders to buy the securities as soon as possible to not be further hurt by rising prices. As with the short squeeze, this creates a feedback loop that pushes the price higher. Companies valued between $100 million and $8 billion (known as small-cap stocks) are good candidates to be shorted, as are stocks with high short interest, or a high percentage of stock shares held by short-sellers.

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Who Loses and Who Benefits From a Short Squeeze?

To learn more, see our Public’s Fee Schedule, Order Flow Rebate FAQ, and Order Flow Rebate Program Terms & Conditions. While a majority of Markets Insider analysts have a Sell rating on the stock, it held up well on July 19, 2021, during a selloff sparked by an increasing number of cases of the delta COVID variant. A financing squeeze is when would-be borrowers find it difficult to obtain capital because lenders fear making loans. This often leads to a liquidity crisis if there is little cash on hand and not enough operating cash flow. Individuals can also face a financing squeeze if they need to borrow and are unable to. Rachel Curry is Pennsylvania-based content writer and journalist talking all things finance.

On the contrary, it has also sparked interest in short sellers, who are predicting that ABCs stock value will eventually decrease, and its only on a temporary upward trend. This was bad news for short-sellers, who had bet the stock would keep falling. Unlike most investors, who want their stocks to appreciate, short-sellers make money when stock prices go down and lose money when they go up. This gives you a number called “days to cover” – the amount of time it may take sellers to cover their short positions, although it may take less time if the squeeze is more aggressive than first perceived. For example, it may be because the company is losing money, its revenues are decreasing, or the company is in a dying industry. The short sellers have been betting that the stock price will go down for years, and some were betting that the company would go bankrupt.

Even when prices are increasing, they often do so with volatility, and short downward swings can trigger the sell order. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Paladio precio Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.

One of the most famous recent examples of a short squeeze was the massive rise of GameStop stock in 2021. In May 2024, the shares surged again after a social media post from the trader that’s credited with igniting the meme stock craze. 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.

Active traders will keep an eye on heavily shorted companies and wait for them to start climbing. This rise in stock price may signal traders that some of the short sellers are starting to close their positions, meaning it may be time for a reversal. The snowball effect of investors buying shares and call options on GME caused the short sellers to close their positions, which in 25 lucrative forex affiliate programs you need to sign up for in 2023 turn caused the stock price to rise further and enticed other buyers to jump on board. The term «squeeze» is used to describe a variety of financial and business situations, typically involving some sort of market pressure.