Short Squeeze

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.

comments powered by Disqus
Related Articles
  1. David Einhorn
    Term

    David Einhorn

  2. Short Call
    Term

    Short Call

  3. Long-Short Ratio
    Term

    Long-Short Ratio

  4. Stock Loan Fee
    Term

    Stock Loan Fee

  5. Stock Loan Rebate
    Term

    Stock Loan Rebate

  6. Short-Interest Theory
    Term

    Short-Interest Theory

  7. Short Covering
    Term

    Short Covering

Trading Center