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.
TradingThe short squeezed strategy can be risky - but also very rewarding - for those who master it.
InvestingShort sellers enable the markets to function smoothly by providing liquidity, and also serve as a restraining influence on investors’ over-exuberance.
TradingThis strategy can help in market downturns, but it's not for inexperienced traders.
InvestingShort sales work well in bull and bear markets but strict entry and risk management rules are required to overcome the threat of short squeezes.
TradingStocks are owned in a long position and owed in a short position.
TradingShort selling and put options are used to speculate on a potential decline in a security or index or hedge downside risk in a portfolio or stock.