What is 'Squeeze'

Squeeze is used to describe many financial and business situations. In business, it is a period when borrowing is difficult or a time when profits decline due to increasing costs or decreasing revenues. In the financial world, it is used to describe situations where short sellers purchase stock to cover losses or when investors sell long positions to take capital gains off the table.

BREAKING DOWN 'Squeeze'

A squeeze is used liberally in finance and business and describes any situation where people are realizing losses, taking gains or finding credit financing difficult. The four types of squeezes are explained below.

Profit Squeeze

A profit squeeze is realized by a business when its profit margins have decreased or are decreasing. This type of squeeze happens when a company's revenue declines or its costs rise. The underlying causes of a profit squeeze are numerous but commonly consist of increased competition, changing governmental regulations and expanding producer and supplier power.

Credit Squeeze

A credit squeeze describes any situation where it becomes difficult to borrow money from banking institutions. This type of squeeze normally happens when an economy is in a recession or when interest rates are rising. The issuance of bad debt, such as in the case of the 2008 financial crisis, often causes a recession and a credit squeeze. Rising interest rates occur because the Federal Reserve deems the economy is healthy enough, and consumer confidence is high enough, to assume a higher rate of interest. Therefore, a credit squeeze can occur in a down market and an up market.

Short Squeeze

A short squeeze is a common scenario in the equities market where a stock's price increases and its purchase volume spikes because short sellers are exiting their positions and cutting their losses. When an investor decides to short a stock, he is betting the price declines in the short term. If the opposite occurs, the only way to close the position is to go long by purchasing shares of the stock. This causes the stock's price to further increase, resulting in further action by short sellers.

Long Squeeze

This type of squeeze occurs in a strong financial market when there are sharp price increases and investors who are long a stock sell a portion of their position for a gain. This normally happens because investors place a stop-loss order to mitigate risk and ensure they are protected against any price declines. Even when prices are increasing, they often do so with volatility, and short downward swings can trigger the sell order.

RELATED TERMS
  1. Liquidity Squeeze

    A liquidity squeeze happens when concern over short-term availability ...
  2. Short Squeeze

    A short squeeze is when a heavily shorted security moves sharply ...
  3. Crowded Short

    A crowded short is a trade on the short side with a large number ...
  4. Short Sale

    A short sale is the sale of an asset or stock unowned by the ...
  5. Short Interest

    Short interest, an indicator of market sentiment, is the amount ...
  6. Short Covering

    Short covering is buying back borrowed securities in order to ...
Related Articles
  1. Trading

    Brick & Mortar Retailers Could Punish Short Sellers

    Brock and mortar retailers are oversold after a long bout of selling pressure and could squeeze overeager short sellers into the summer months.
  2. Investing

    How To Short Amazon Stock

    With the stock reaching all-time highs and the company gambling on several new business lines, many investors may feel it's a good time to short sell Amazon.
  3. Trading

    Using The VIX For Shorting Opportunities

    Find out how to use this tool to identify opportunities.
  4. Investing

    Short Selling Risk Can Be Similar To Buying Long

    If more people understood short selling, it would invoke less fear, which could lead to a more balanced market.
  5. Investing

    Short selling basics

    Short sellers enable the markets to function smoothly by providing liquidity and also serve as a restraining influence on investors’ over-exuberance.
  6. Trading

    How To Protect A Short Position With Options (FB, AAPL)

    Short selling can be a risky endeavor, but the inherent risk of a short position can be mitigated significantly through the use of options.
  7. Trading

    GameStop Earnings Could Trigger Short Squeeze

    GameStop shares have sold off to multi-year support, while technical readings have hit deeply oversold levels.
  8. Trading

    Shorts Pummel Sears Shares After Kenmore Rally Fades

    Sears rallied more than 23% after an agreement to sell the Kenmore brand on Amazon but gave up those gains in a two-day rout.
  9. Tech

    Trends Putting The Squeeze On Financial Advisors

    As people change the way they approach and save for retirement, the role of financial advisors is evolving as well.
  10. Managing Wealth

    Value Investing & Short Selling Are Like Oil & Water

    To be a good value investor, you need to find and buy bargain stocks but more importantly, you have to stick to the trade until the market recognizes the worth of these securities.
RELATED FAQS
  1. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  2. What does "squeezing the shorts" mean?

    "Squeezing the shorts" refers to a questionable practice of taking advantage of a heavily shorted stock by buying up large ... Read Answer >>
  3. How long should you hold on to a short?

    Explore the reasons for short selling and the various factors that influence how long an investor may wish to maintain a ... Read Answer >>
  4. Here's What Short Sellers Must Do to Short a Stock

    Learn what benefits a short seller is required to make up to the lender of shares, or long investor, when shorting a stock ... Read Answer >>
Trading Center