What Are Short Squeeze Stocks?

Author: George Davis

A short squeeze stock is an unusual market condition that causes the stock prices to increase. Read this blog post to learn what are short squeeze stocks and everything about short selling.

When the conventional buying and selling of stocks becomes mainstream and doesn’t have many rewards in it, sellers tend to short-sell stocks. Short selling is betting that a company’s share price will drop, while, in short squeeze, the share price of a company starts to increase rather than decrease. If you are new to the stock market and just starting your investment career, you are in the right place. In this blog post, we will explain short squeeze stocks and everything else related to them. So, keep reading to learn more.

What Are Short Squeeze Stocks?

A short squeeze is an unusual market condition where the share price of a particular stock rapidly rises. This condition creates market disruption, escalating the price of a rising stock further. A short squeeze happens when short sellers make a wrong prediction about the share price of a particular company. To build a firm understanding of short squeeze, we need to learn more about short selling.

What Is Short Selling?

Short selling is a risky market move that offers a tremendous reward. It’s a market position investors take when they are sure that the share price of a particular company will drop. Short-sellers borrow stocks from their brokers and sell them to the general public. When the share price drops, they make profits equal to the drop percentage. For example, a short seller borrows stocks for $50. Currently, the short seller hasn’t paid the broker because the stock is “borrowed” not “purchased.” The short seller would then sell this stock to a buyer at the same price or higher.

If the share price of the borrowed stock decreases to $20, the short seller has to pay the decreased price to the broker instead of $50. Hence, the short seller made a profit of $30 per stock. Now, imagine the profit if the short seller bought and sold 5,000 stocks at this rate.

How Does Short Selling Go Wrong?

When short selling goes wrong, it creates a market position called the short squeeze. A short squeeze happens when there is an unusual number of short-sellers in the market. However, the high number of short-sellers doesn’t directly cause a short squeeze. Instead, a short squeeze happens when the share price of a particular company goes against collective prediction.

For example, a car manufacturing company reveals its new line of vehicles and receives a good response from the market. However, the vehicle is delayed from its release date, and the market anticipates a fault in the design. Short-sellers take advantage of this situation and short sell stocks by borrowing and selling further hoping the share prices will drop. However, if the company recovers in time miraculously and starts taking orders, the share price will trigger a rapid increase. In this situation, short-sellers start “buying” the stock they had borrowed because they cannot delay their payments any longer. When the purchase is triggered by an unusual number of short-sellers, the stock prices rise even further due to the laws of demand and supply and cause a significant short squeeze.

In a Nutshell

Short selling is a risky stock market practice that sometimes results in a massive loss. Most Wall Street pros believe that it’s better to bet on a company’s stock to increase rather than to fall because no organization would want their stock price to decrease, and they will try everything in their power to restore their operations and lift their stock price.

Stock Picks

1. Ford Motor Company (F)

2. IShares Global Clean Energy ETF: (ICLN)

3. NVIDIA Corporation (NVDA)

Find the top stock picks with guidance on when to sell, buy and further information by subscribing to the PT Premium Service in the Proficient Trader App