– what is short squeeze in stocks
In: Economics
When you’re shorting a stock, you’re borrowing shares from someone and selling those shares, but you must eventually give those same number of shares of that stock back. People do this because if you sell the stock for more than you eventually buy it back for, you just made money on a stock price falling. A short squeeze happens when a stock that is being shorted a lot is going up in price. The people who are shorting the stock then want to buy it back as soon as possible so they don’t lose even more money. This makes the stock price go up even more, which means even more losses for people in the short position who haven’t bought it back yet. This can escalate very quickly as we saw with GME a few years ago.
When you short a stock, you are basically borrowing some stocks now and selling them with the promise to return those stocks later. When the short is due, you have to buy back the stock at whatever the price is and return it to whoever loaned it to you.
A short squeeze happens when too many people are shorting a stock. The huge influx of people buying the stock as their shorts come due causes the price to rapidly inflate, and all of a sudden some of the people who shorted the stock now have to spend significantly more money buying them back than they sold the original shares for.
This is what happened with GameStop in 2021. That incident even has a Wikipedia page about it! https://en.wikipedia.org/wiki/GameStop_short_squeeze
A short:
– You borrow stocks that you believe are going to decrease in value
– Sell them immediately, wait, and buy them back to return to the original owner
– the profit comes from pocketing the difference between the higher value when you sold it and the lower value when you repurchased it
A short squeeze:
– when a lot of people short the same stock, and the increase in transactions on that stock causes the price to spike suddenly instead of continuing to drop
– This forces the people who are shorting the stock to buy it at the higher price, because they are borrowing the stock and don’t own it, costing them money
What happens if you don’t fulfil the short? Hedge funds have gazillions…but what about a retail investor who is caught in a short squeeze and just doesn’t have the funds?
If this is in relation to the current iteration of the memestock that is getting pushed, you really want to stay out of it.
Memestocks are a scam. It’s the same scam as paid seances, or astrology, or mind reading. They just use official sounding words. Keep in mind these are the same people that spent many hours pretending to find hidden messages in a series of children’s books written by a bored billionaire who was so incompetent he got booted twice. The purpose of these messages was to provide guidance on how to bring about a financial apocolypse that would leave them infinitely wealthy and in control of the entire world.
Stay away. This is a greater fool grift.
Shorting a stock is a trade where you predict the stock will decrease in value. You borrow shares from someone and sell them on the hope that you can buy them back later for cheaper. When you buy them back, you return the shares to the lender and you keep the difference as profit.
If you bet wrong, you have to buy the shares back at a higher price than you sold them. Because share prices can rise to infinity, there is no limit on how much money you can theoretically lose. Therefore, most short sellers will set limit orders where, if the price rises too high, they will buy the shares back at a small loss to prevent a larger loss.
A short squeeze is a doom loop that occurs when too many people short a stock, but the stock price increases. As the stock price increases, short sellers buy the stock back to limit their losses. This increases demand for buying the stock, which raises the price. The higher price causes more short sellers to buy stock back to limit their losses, which creates more demand that pushes the stock higher.
Eventually, a short squeeze ends because enough short sellers have rebought stock to protect themselves from losses. The price of the stock falls to meet the natural demand that remains compared to the temporary and artificial demand created by short sellers buying stock to protect themselves.
Others here have already given excellent explanations of what a short squeeze is.
However, OP, if you or anyone else are wondering about this as it relates to the Gamestop stock, you would be well advised to steer clear. GME is what’s known as a meme stock and an example of a “[greater fool](https://en.wikipedia.org/wiki/Greater_fool_theory)” asset:
Wikipedia:
>In finance, the greater fool theory suggests that one can sometimes make money through speculation on overvalued assets — items with a purchase price drastically exceeding the intrinsic value — if those assets can later be resold at an even higher price.
>In this context, one “lesser fool” might pay for an overpriced asset, hoping that they can sell it to an even “greater fool” and make a profit. This only works as long as there are enough new “greater fools” willing to pay higher and higher prices for the asset. Eventually, investors can no longer deny that the price is out of touch with reality, at which point a sell-off can cause the price to drop significantly until it is closer to its fair value, which in some cases could be zero. The last “fools” to purchase in on the product in question are then left holding the bag, allowing earlier, lesser fools to make off with the profit.
and:
>A bubble starts when any group of stocks, in this case those associated with the excitement of the Internet, begin to rise. The updraft encourages more people to buy the stocks, which causes more TV and print coverage, which causes even more people to buy, which creates big profits for early Internet stockholders. Successful investors tell you at cocktail parties how easy it is to get rich, which causes the stocks to rise further, which pulls in larger and larger groups of investors. But the whole mechanism is a kind of Ponzi scheme where more and more credulous investors must be found to buy the stock from the earlier investors. Eventually, one runs out of greater fools.
— Burton Malkiel
Stay away from meme stocks. Speculating on individual stocks is like gambling. Speculating on stocks that are being pumped and dumped is even riskier than gambling against random market noise. You might think you’re getting in on the pump side, when you’re actually the dump for early “investors.” Don’t be somebody else’s exit strategy.
In the 2021 GME bubble, people thought they were sticking it to hedge funds and institutional investors. What they were really doing is a lot of ordinary folk who got caught up in the Reddit hype lost a ton of money and transferred their money to a few sharp individuals who got in early enough on the pump and dump and got out before the bubble popped.
If you really want to get into the rabbit hole of GME, checkout [This Is Financial Advice](https://www.youtube.com/watch?v=5pYeoZaoWrA).
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