If you've been an investor for at least a few years, you probably recall the "meme stock" craze of 2021. What you might not realize is that a large portion of the sharp gains certain stocks experienced during that period were the result of short squeezes.

In case you aren't familiar with short squeezes, here's the quick version. Investors (usually hedge funds and large institutions) may develop a negative opinion about a company and sell its stock short in large quantities in a bid to benefit from the expected share price drop. Then some event happens that shifts investor sentiment to positive, and the shares start to rise instead. At a certain point, short sellers will begin to buy shares in quantity to close out their positions and limit their losses. That buying drives the share price up even further, especially if there's a scarcity of investors willing to sell. As the price ascends, more short sellers rush to buy so that they too can exit their short positions, creating a temporary, but vicious cycle.

If a stock has a high percentage of its available shares sold short (also known as short interest), this can result in a massive spike in the stock's price -- a short squeeze.

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Source Fool.com