What Is a Short Squeeze? The Motley Fool

Buying into a company in the hope of lassoing a rocketing price is speculative at best. In October 2008, amid the broader financial crisis that caused most every stock to trade down, Volkswagen’s stock continued to trade higher. Those who didn’t think a deal with Porsche would happen, or were buying Volkswagen stock to hedge another investment, shorted the automaker’s stock, assuming that its price would fall eventually. Keep in mind that other fees such as regulatory fees, Premium subscription fees, commissions on trades during extended trading hours, wire transfer fees, and paper statement fees may apply to your brokerage account. During this time, day trading and individual investing had increased, and the news of this potential bull case had circulated. There was also heightened interest in GameStop in spaces such as WallStreetBets (a Reddit forum), which had pegged GameStop as an undervalued stock for some time.

  1. It is not intended as a recommendation and does not represent a solicitation or an offer to buy or sell any particular security.
  2. Another important metric to look at when trying to identify stocks where a short squeeze may occur is the short-interest ratio.
  3. Refer to the Characteristics and Risks of Standardized Options before considering any options transaction.
  4. For instance, the GameStop saga stirred significant swings within its own stock price and the broader market, influencing the performance of other stocks and sectors.

You should consult your legal, tax, or financial advisors before making any financial decisions. This material is not intended as a recommendation, offer, or solicitation to purchase or sell securities, open a brokerage account, or engage in any investment strategy. As mentioned earlier, short interest is the total amount of outstanding shares that haven’t been closed by short sellers. A high short interest, such as 20% or above, can be an indicator of a short squeeze. A high short interest means that a large number of outstanding shares have been sold short but not yet covered or closed.

While a low short interest ratio shows a lower average of days needed to cover a position, a high short interest ratio shows the opposite. Regardless of a stock’s performance and whether or not it performs well, the short seller will always have to return the borrowed stock to their broker. The short seller can What makes a good trader pocket a profit from using this strategy, but the losses that can be accrued from this may outweigh the potential gains. It’s 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.

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Playing the squeeze on the long side?

Short squeezes can be exciting, especially if you own the stock before it rockets higher, though many short squeezes are relatively modest. Still, it’s important to understand that no one knows when a short squeeze will end. Investment Plans (“Plans”) shown in our marketplace are for informational purposes only and are meant as helpful starting points as you discover, research and create a Plan that meets your specific investing needs. Plans are self-directed purchases of individually-selected assets, which may include stocks, ETFs and cryptocurrency.

Daily moving average charts

There are various indicators that investors may use when predicting an upcoming short squeeze. Some of those indicators may be short interest, days to cover or the short interest ratio, buying pressure, and the relative strength index (RSI). For example, let’s say ABC stock has been creating a buzz in the stock market, causing buyers to invest in the stock because of its good performance and their prediction that it will continue to increase. On the contrary, it has also sparked interest in short sellers, who are predicting that ABC’s stock value will eventually decrease, and it’s only on a temporary upward trend. Tactics like setting stop-loss orders, which essentially instruct a broker to sell a stock once it reaches a certain value or maintaining a diversified portfolio can help mitigate risks. Proactively staying informed can also shield investors from the risks of short selling and possibly leverage market volatility to their benefit.

Plans are not recommendations of a Plan overall or its individual holdings or default allocations. Plans are created using defined, objective criteria based on generally accepted investment theory; they are not based on your needs or risk profile. You are responsible for establishing and maintaining https://www.day-trading.info/how-accurate-is-technical-analysis-the-benefits/ allocations among assets within your Plan. See our Investment Plans Terms and Conditions and Sponsored Content and Conflicts of Interest Disclosure. Options transactions are often complex, and investors can rapidly lose the entire amount of their investment or more in a short period of time.

Our estimates are based on past market performance, and past performance is not a guarantee of future performance. The stock market crash of 1929 caused a financial frenzy in the United States. The first bank runs occurred in the fall of 1930 in Nashville, when account holders rushed to withdraw all of their funds at once from the bank.

Where Can I Find Information on Stocks with High Short Interest?

The stock of theater chain AMC has also been the subject of a short squeeze, though not as prominently as GameStop. Some have suggested that Tesla has been subject to a years-long short squeeze, given its high short interest and massive overvaluation, relative to competition. While high-profile squeezes get a lot of press when they occur, many stocks experience short-lived squeezes throughout a typical year as longs and shorts battle back and forth.

Spotting short squeeze stocks

All corporate names are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Many or all of the products featured here are from our partners who compensate https://www.topforexnews.org/brokers/fibo-group-launched-metatrader-5-web-and-mobile/ us. This influences which products we write about and where and how the product appears on a page. A financing squeeze is when would-be borrowers find it difficult to obtain capital because lenders fear making loans.

To gain a better understanding of how a short squeeze works, let’s break down the process into two phases. The first phase of short selling is to sell the stock, and the second phase (which is mandatory) is to buy the borrowed stock back to return the stock to its original owner. Transitioning from how a short squeeze operates to understanding its implications, it’s noticeable that short squeezes can lead to considerable price swings. This is very important to anyone who has a vested interest in the stock as they could lose or gain significantly from the situation.

A short squeeze is an unusual condition that triggers rapidly rising prices in a stock or other tradable security. It occurs when a security has a significant amount of short sellers, meaning lots of investors are betting on its price falling. The short squeeze begins when the price jumps higher unexpectedly and gains momentum as a significant measure of the short sellers decide to cut losses and exit their positions. 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. A notable short squeeze occurred among traders and investors of GameStop Corp. (GME) during the months following the COVID-19 pandemic. The short interest had grown so dramatically that it amounted to more than 100% of the shares outstanding.

We believe everyone should be able to make financial decisions with confidence. A business can face a profit squeeze when its profit margins have decreased or are decreasing. This type of squeeze happens when a company’s revenue declines or its costs rise and it is unable to raise prices accordingly. The underlying causes of a profit squeeze are numerous but commonly consist of increased competition, changing governmental regulations, and expanding producer and supplier power. There are many examples of stocks that moved higher after they had a heavy short interest.

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. Anyone who buys in hopes of a short squeeze should have other (and better) reasons to think that the price of the stock will go higher.

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