Conversely, if there are more investors who want to buy shares than the market can accommodate, the stock’s price will move higher until enough shareholders are willing to sell shares to all of the interested buyers. The latter is the basic idea underpinning a short squeeze — but more on that later. Brokerage services for alternative assets available on Public are offered by Dalmore Group, LLC (“Dalmore”), member of FINRA & SIPC. “Alternative assets,” as the term is used at Public, are equity securities that have been issued pursuant to Regulation A of the Securities Act of 1933 (as amended) (“Regulation A”). These investments are speculative, involve substantial risks (including illiquidity and loss of principal), and are not FDIC or SIPC insured.
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All investments involve the risk of loss and the past performance of a security or a financial product does not guarantee future results or returns. You should consult your legal, tax, or financial advisors before making any financial decisions. This material is not intended as a recommendation, offer, or solicitation to purchase or sell securities, open a brokerage account, or engage in any investment strategy. Since a short seller’s buying decision for a how to buy chainlink stock makes a stock’s price increase, this ultimately leads to other short sellers buying to exit the position. In addition, a stock’s price increase may also encourage regular buyers to invest in the stock with the belief that the stock’s value will continue to increase. Some events that may encourage short sellers to open positions can include a product announcement, a positive news story, or an increase in the stock’s performance that attracts buyers.
With consumers locked down and stores often closed, analysts and investors expected the company to potentially face bankruptcy because of a rise in competition and a decline in foot traffic at brick-and-mortar stores. The short interest had grown so dramatically that it amounted to more than 100% of the shares outstanding. A short squeeze is an unusual condition that triggers rapidly rising prices in a stock or other tradable security. It occurs when a security has a significant amount of short sellers, meaning lots of investors are betting on its price falling.
But the numbers can be deceiving since there are technical reasons that can enable a single share to be shorted more than once. This distortion can lead to a stock’s shorting percentage being inflated. A notable short squeeze occurred among traders and investors of GameStop Corp. (GME) during the months following the COVID-19 pandemic.
Other Types of Squeezes
This is not an offer, solicitation of an offer, or advice to buy or sell securities or open a brokerage account in any jurisdiction where Open to the Public Investing is not registered. Securities products offered by Open to the Public Investing are not FDIC insured. Apex Clearing Corporation, our clearing just2trade overview firm, has additional insurance coverage in excess of the regular SIPC limits. A short squeeze is a quick path to getting a lot of juice out of a stock. Short squeezes can be exciting, especially if you own the stock before it rockets higher, though many short squeezes are relatively modest.
- The co-founder of Chewy, Ryan Cohen, also disclosed that he had a huge stake in the company.
- Positive product news or earnings reports can quickly derail a short.
- It starts with investors making assumptions about a particular stock’s price.
- An indication of interest to purchase securities involves no obligation or commitment of any kind.
This causes the stock’s price to increase and forces short sellers to attempt to buy the stock in order to close out their positions and cut their losses. However, because the trader has bought up large blocks of the stock in question, the short sellers may find it very difficult to buy stock at a price that they prefer. The trader can then sell the stock to the desperate short sellers at a higher premium. During a short squeeze, short sellers run the risk of losing a substantial amount of money if the stock price continues to increase. In addition, a large short interest can go either way, meaning that the stock price can still increase just as much as it can decrease.
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Positive product news or earnings reports can quickly derail a short. Frantic buying can drive stock prices to rise out of control, squeezing the short-sellers out of their positions. If, for example, NoGood Co. reported better-than-expected earnings and its stock price jumped to $120, then panicked short-sellers might meme stocks rush to close out their positions before the share price kept climbing. This sudden high demand could cause the stock’s price to rise even more sharply to $130 or $140 per share. Long squeezes are not as dramatic to the market as short squeezes but can be witnessed by looking at the intraday charts of any large stock.
‘Dumb Money,’ the movie based on the 2021 GameStop trading frenzy, comes up short
Active traders will monitor highly shorted stocks and watch for them to start rising. If the price begins to pick up momentum, the trader jumps in to buy, trying to catch what could be a short squeeze and a significant move higher. 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.
Hedge Fund Losses
As mentioned, a squeeze can happen when stock prices unexpectedly come under pressure. Investors who own the stock may feel “squeezed” by rapidly changing prices and as a result, they change their positions in the stock. Short interest is typically updated at the end of each month and tells you the quantity of shares sold short as a percentage of the stock’s float, or the number of shares that are actually available to trade. For example, if a company has a float of 10 million shares and 2 million shares are currently sold short, it would have a short interest of 20%.
What are the risks of a short squeeze?
As these short sellers buy the stock, the price rises, potentially creating a situation in which more shorts have to cover. Most online brokerages and stock data websites provide information indicating, for each publicly traded company, the number of shares sold short and the total number of shares outstanding. To find the percentage of shares being shorted, divide the number of shares sold short by the total number of shares outstanding and then multiply by 100. Although company size and the number of shares available can be relevant factors, companies with more than 25% to 30% of their shares sold short could be prime candidates for a short squeeze.
In early 2023, the most heavily shorted companies included Coinbase Global (COIN), a cryptocurrency firm, and Occidental Petroleum (OXY). There is considerable skepticism among investors about whether this drug will actually work. In fact, 5 million Medicom shares have been sold short of its 25 million shares outstanding. This means that the short interest in Medicom is 20%, and with daily trading volume averaging one million shares, the short interest ratio is five. The short interest ratio, also called days to cover, means that it will take five days for short sellers to buy back all Medicom shares that have been sold short. Short interest is the total number of shares sold short as a percentage of the total shares outstanding.
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The higher the short-interest ratio, the greater the chance of a squeeze. A short squeeze is a sudden increase in the price of a stock due to a large number of short-sellers buying shares to cover their positions. Correctly timing a short squeeze can be a very lucrative strategy, but with this high reward potential comes high risk. A trader looking to profit from a potential short squeeze should make a careful study of short squeeze predictors including short interest, the short interest ratio, daily moving averages, and industry trends. 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.
This is definitely part of what was happening in GameStop (GME) stock. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.