Short Squeeze: Meaning, Overview, and FAQs

what is stock 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. 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). Another technical indicator that traders monitor is what is known as “days to cover.” It is a metric derived from comparing the total short-selling interest in a stock to its average daily trading volume. Of course, you can’t simply sell what you don’t own with no consequences — at some point, those borrowed shares have to be returned. When that day comes, the investor needs to buy shares in the market to be able to return them to the lender.

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. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

what is stock squeeze

The offers that appear on this site are from companies that compensate us. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.

Our Services

The federal government quickly stepped in to assure depositors that their money was safe, even beyond normal Federal Deposit Insurance Corporation limits, which appeared to defuse the situation. Naked short selling is short selling a stock without first borrowing the asset from someone else. It’s the practice of selling short shares that have not been affirmatively determined to exist. Securities and Exchange Commission (SEC), naked short selling is illegal. The percentage of Tesla stock that represented short interest in late 2019.

Movie theater company AMC Entertainment Holdings Inc. and brick-and-mortar retailers like Express and Bed Bath & Beyond have been recent short-squeeze targets since 2021. 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. Quickly, this credit squeeze spread across the U.S., causing many banks to liquidate their loans to appease their depositors, leading to multiple bank failures.

what is stock squeeze

Someone who doesn’t have enough money to hold on any longer, or someone whose pain threshold has finally been crossed. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. In a liquidity crisis, a business or financial institution doesn’t have sufficient liquid assets, such as cash, to meet its near-term obligations.

We and our partners process data to provide:

If the short seller’s prediction is wrong, and the stock’s value increases, it forces them to buy the stock back at a higher price from which it was sold, and pay for the difference. In simpler terms, just remember that short selling is a way for short sellers to make a quick profit by borrowing a stock or security to sell and then buying it back to possibly profit and return the stock. Short squeeze is a term used to describe a phenomenon in financial markets where a sharp rise in the price of an asset forces traders who previously sold short to close out their positions. The strong buying pressure “squeezes” the short sellers out of the market. In short trading, the main risk lies in the potential for unlimited losses, as a stock’s price can rise indefinitely, and a short seller’s losses grow as the price continues to increase.

  1. Days to cover, also known as the short interest ratio, is calculated by taking a stock’s total number of shares sold short and dividing that number by the stock’s average daily trading volume.
  2. Short squeezes occur when a highly shorted stock suddenly and quickly increases in price.
  3. To understand the short squeeze meaning further, it’s important to understand short and long positions, the roles of short sellers and buyers, and how these forces can create a bullish trend in the stock market.
  4. The issuers of these securities may be an affiliate of Public Investing, and Public Investing (or an affiliate) may earn fees when you purchase or sell Alternative Assets.
  5. The short interest ratio shows the average number of days needed to exit a short position.
  6. In addition, Porsche’s unexpected announcement and major increase in its stake ownership in Volkswagen left very few available shares for short sellers to account for.

If the stock price rises instead, a short-seller may lose money — they still have to return the shares to the broker, which may require buying them back at the new higher price. The collapse of Silicon Valley Bank in March 2023 illustrated several types of squeezes. First the bank faced a profit squeeze due to poor returns from its investment portfolio. Then jittery depositors rushed to withdraw their money in a modern-day version of a bank run, forcing it to liquidate a substantial portion of its investments at a loss. That caused fears of a domino effect in which other banks would fail, creating a nationwide credit squeeze.

GameStop Short Squeeze

However, it is important to note that not all high short interest stocks or technical patterns will result in a short squeeze. Thorough analysis and a holistic understanding of market dynamics are necessary to make informed investment decisions. During that time, Volkswagen became one of the most valuable companies in the world as its share price increased to over EUR 1,005 per share or over $1,000 per share. Porsche benefited by reaping over $10 billion in profit, while short sellers lost billions of dollars over those couple of days. However, Volkswagen’s stock peak eventually came to an end, falling by almost 60% in a few short days. This creates what is referred to as a “stock squeeze” or a “squeeze” from the pressure of short sellers being forced to exit the position.

But if it’s not, short sellers can face runaway losses as the expiration date on their positions approaches. They generally opt to sell out immediately, even if it means taking a substantial loss. 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. It is important to note that participating in short squeezes can be highly volatile and unpredictable.

Neither Schwab nor the products and services it offers may be registered in your jurisdiction. Neither Schwab nor the products and services it offers may be registered in any other jurisdiction. Its banking subsidiary, Charles Schwab Bank, SSB (member FDIC and an Equal Housing Lender), provides deposit and lending services and products. Access to Electronic Services may be limited or unavailable during periods of peak demand, market volatility, systems upgrade, maintenance, or for other reasons.

Short selling involves borrowing shares from a broker and then selling them on the open market, with the intention of repurchasing the shares at a lower price in the future to return them to the lender. So, this trading approach occurs when traders believe that the price of a particular stock is overvalued or likely to decline, and engage in short selling as a way to profit from the anticipated drop in value. 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. 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.

Closing Market Update

A short squeeze is a high-risk situation and it may cause havoc in the market, but most don’t last forever. It’s important to always do your homework, and remember it’s never wise to go all in. A stock that’s in a short squeeze may still have a long way to climb, and if you don’t think the fundamentals support higher prices, then perhaps you should look elsewhere. The trick is to identify the conditions that could lead to a squeeze ahead of time, and then determine how you might want to play it (or not). When Porsche announced a takeover of Volkswagen in October 2008, short-sellers scrambled and prices soared.

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.

Therefore, it is crucial to remain vigilant, adapt to changing market conditions, and be prepared to adjust strategies as needed. Thorough research, continuous monitoring of market data, and disciplined execution are key elements for successful participation in short squeezes. 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.