![]() That causes a sudden surge in demand that drives up the stock’s price dramatically.Ī short squeeze can feel a lot like playing the stock market’s twisted version of musical chairs. When there are a lot of investors shorting the same stock, there’s a chance that many of them will end up buying that stock back at the same time. Either way, it could cause some serious headaches for anyone short selling that stock. Some short squeezes last for a few days, and others could last for several months. Basically, a short squeeze is when short selling backfires. What Is a Short Squeeze?Ī short squeeze happens when the price of a heavily shorted stock unexpectedly shoots up in price. Shorting a stock just isn’t worth the risk.Īnd that brings us to. you could be facing some devastating losses. If you’re right, you can make some money. You’re not really investing, you’re gambling. The bottom line is: Short selling is extremely risky-riskier than walking through a den of sleeping lions with your pockets full of beef jerky. Market chaos, inflation, your future-work with a pro to navigate this stuff. But what if the price soared to $150 instead? Then you would end up with a $50 loss. If the price drops to $75 a few weeks later and you decide to buy back that stock at that price, you would make a $25 profit. Problem: If the stock price goes up instead of down, you’ll lose money because you’ll have to buy it back for more than you sold it for.įor example, let’s say you want to “short” a stock and sell it when it’s worth $100. ![]() When you return the stock to the broker, you get to keep the difference of the purchase as a profit (minus fees and interest). If everything goes according to plan, the price of the stock tumbles down and you buy those shares back at a cheaper price than what you sold them for.The catch is that you have to buy those shares back eventually and return them to the broker. Then, you sell those shares on the stock market. First, you need to borrow the shares of a stock you want to bet against from a broker. ![]() In a nutshell, here’s how short selling works: Basically, they make money when the price of that stock goes down, but lose money if the price goes up. Here’s a quick refresher on short selling: When someone “shorts” a stock, that means they’re betting against it. Understanding a Short Squeezeīefore we dive deeper into short squeezes, we need to talk about short selling (that’s where the “short” in short squeeze comes from). ![]() 1īut how exactly do short squeezes work? And is there a way to spot one before it actually happens? Let’s take a closer look. Netflix is even planning to make a movie about the GameStop stocks saga (which we’ll talk about a little later). Don’t forget, institutions must file with the SEC soon after acquiring even 5% of a company.A short squeeze (not to be confused with a “quick hug”) is an investing phenomenon that happens when the price of a stock that everyone seems to be betting against suddenly shoots up faster than a bottle rocket on the 4th of July.įrom GameStop to AMC, short squeezes can potentially turn Wall Street upside down and capture the imaginations of many investors. There were serious legal issues surrounding a private company sneakily accumulating so much of a public company. They didn’t do this out of the goodness of their hearts. Porsche would later agree to sell up to 5% on the open market to return some liquidity to short sellers. It sent the share price vertical although not for long. This caused what is now referred to as an infinity squeeze. Except 13% of the company was sold short so they were screwed. This only left about 5-6% of shares available on the open market for shorts sellers to cover with. Another roughly 20% was owned by the German state of Lower Saxony. Using cash and derivatives, Porsche managed to acquire a 75% stake in Volkswagen. The price of VW shares soared, leading to significant losses for short sellers. This news caused a short squeeze in VW shares, as short sellers rushed to buy back their positions in order to avoid further losses.
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