Short Squeeze

Watching short interest can tell you whether investor sentiment about a company is changing. For example, if a stock typically has a 15% to 30% short interest, a move above or below that range could signal that investors have shifted their view of the company. Fewer short shares could mean that the price has risen too high too quickly, or that the short sellers are leaving the stock because it has become too stable. Short sellers zero in on a stock that they think is overvalued by the market. For example, Tesla Inc. (TSLA) captured the enthusiasm of many investors with its innovative approach to producing and marketing electric vehicles. In early 2020, Tesla was the most-shorted stock on the U.S. exchanges, with more than 18% of its outstanding stock in short positions.

If short sellers’ bets were based on a company announcing bad news and it announces decent news instead, short sellers could head for the exits and trigger a squeeze. Banking services and bank accounts are offered by Jiko Bank, a division of Mid-Central National Bank. JSI and Jiko Bank are not affiliated with Public Holdings, Inc. (“Public”) or any of its subsidiaries. Although short squeezes may occur naturally in the stock market the U.S.

What is a long position?

Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. 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. You can trade Treasury securities and Regulation A securities on the Public platform.

What is an example of a short squeeze?

Example of a Short Squeeze

Suppose that Company C was borrowed on margin by a trader who then sold 1short 00 shares at $25. Several days later, Company C's stock price plummets to $5 per share, prompting the trader to buy it back.

The best-case scenario is that the price falls, so the short-seller can buy the shares for a lower price than what they sold them for when they borrowed them. However, if the price rises instead of falls, a can occur. They either have to put more money up to secure their position or close their positions. The company is one of the most shorted stocks at 45.79% of the float, as of August data. In other words, almost 40 million shares are shorted out of 86 million shares floating. On the other hand, a bullish catalyst can be the spark for a short squeeze.

GameStop short squeeze

Securities products offered by Open to the Public Investing are not FDIC insured. Apex Clearing Corporation, our clearing firm, has additional insurance coverage in excess of the regular SIPC limits. Buying pressure, when it comes to stocks, can mean a multitude of things. However, a sudden pressure or increase in the number of shares bought can also lead to a short squeeze. It’s important to note that buying pressure alone may not be a substantial indicator that a short squeeze will occur, but it may be used in support of other indicators. To gain a better understanding of how a short squeeze works, let’s break down the process into two phases.

  • GME attracted substantial media attention as retail investors celebrated the losses of hedge funds.
  • When this happens, the short-sellers are squeezed out of their position, being forced to buy shares at a loss.
  • Eventually, Saunders settled the dispute for $100 per share and took in millions in losses.
  • Short-sellers who had bet on the stock declining realize that they are wrong, so they start buying shares to cut their losses.
  • A rapid rise in the stock price is attractive, but it is not without risks.
  • The company went public in 1922 and looked set for further growth, inviting bull predictions from traders in the first few months of the year.

A rise in short interest above the norm indicates that investors have become more bearish. But an extremely high reading could be a sign of a coming short squeeze, which could force the price higher. When identifying stocks at risk of a short squeeze, two useful measures are short interest and the short interest ratio. Piggly Wiggly was the first self-service grocery store in the United States. It first opened for business in 1916 in Memphis before rapidly expanding and opening in several states across the southern belt of the US.

How we make money

Those who are still holding their investments may be down hundreds or even thousands of dollars with little hope for recovery. These are the companies with the largest proportions of outstanding shares currently sold short. It can be an instance of unexpected good news regarding Short Squeeze the stock, such as a very favorable earnings report that far exceeds the expectations of market analysts. It can also be that technical traders begin buying the security as they see indications that it is oversold and, therefore, possibly ripe for a reversal to the upside.

Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Also, looking at the Volkswagen chart above, notice the price went down nearly as fast as it went up. By the end of 2008, the stock’s price was basically back to where it started before the squeeze.

Pin It on Pinterest

Share This