Short Squeeze

Next video:
Loading the player...

A short squeeze refers to a jump in a stock's price, forcing a large number of short sellers to close their position, which in effect pushes the price even higher.

When an investor shorts a stock, he borrows shares from another account and sells them, agreeing to replace the stock at a later date. Short sellers predict the price will go down, enabling them to buy the shares at a lower price.

When the share price starts to rise, many of these same investors will decide to buy the stock before their losses escalate further. This flood of buy orders causes the price to climb even more.

Contrarian investors will sometimes try to cash in on this phenomenon by taking a long position on heavily shorted stocks – that is, buying them with the hope that they’ll appreciate.

Going against the crowd like this is typically a high-risk, high-reward proposition. Even so, some feel it’s safer to bet on a stock rising than on one falling, where the potential losses are limitless.

Related Articles
  1. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  2. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  3. Investing

    Watch Your Duration When Rates Rise

    While recent market volatility is leading investors to look for the nearest exit, here are some suggestions for bond exposure in attractive sectors.
  4. Investing

    A Quick Explanation of How Short Selling Works

    Explanations of short selling can be hard to grasp. Here is a quick, realistic example.
  5. Chart Advisor

    Downtrending Stocks to Short or Sell

    These stocks are trending lower and currently near a short sale areas, based on breaks lower and falling stock indexes.
  6. Chart Advisor

    Second Chance Entries Into Completed Double Tops

    These stocks have already completed double top chart patterns, and are right now offering a second chance to trade it.
  7. Forex Strategies

    This Might Be the Best Time to Buy Colombian Pesos

    Signs are growing that energy markets are bottoming out, allowing the Colombian Peso to recover its value in a profitable trend against the U.S. Dollar.
  8. Active Trading Fundamentals

    Short Selling Tutorial

    Short selling makes it possible to sell what one does not own, by borrowing an asset, selling it, and then buying it back to replace the borrowed asset.
  9. Stock Analysis

    What Led to Lumber Liquidators' Decline?

    Read about how a "60 Minutes" story on laminate flooring sold by Lumber Liquidators led to a massive decline in the share price for the company.
  10. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!