Are These 3 Companies Next for Short Squeezes?
In March 2021, Reddit investors made headlines by sending GameStop (NYSE: GME) rocketing through a short squeeze. To short a stock means to bet against it, so the investor profits as the stock price moves lower. The shorting mechanism works by borrowing a share from a shareholder at the opening price and then selling it. The borrowing party closes out their trade by purchasing a new share which is returned to the original owner. For example, if I borrow a share from you at $50 (opening a short position) and then the stock moves to $40, I made a $10 profit because I borrowed and sold the share at $50 and returned the share after it was purchased for $40.
If the share price moves higher instead, many short sellers may be forced to close out their bearish positions. Brokerages typically have automatic short-sale liquidation rules in place, triggered by unreasonably large losses on paper.
A short squeeze occurs when many short positions are closed at the same time. Because there would be massive purchasing volume (to buy back the shares) and normal to low selling volume, the price rises due to supply and demand laws -- sometimes causing another wave of automatically managed closings. And then the vicious cycle continues.
Source Fool.com
