– what is short squeeze in stocks
In: Economics
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.
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