Back in 2008, in the middle of the financial crisis, Volkswagen’s stock was short squeezed. This forced short sellers to frantically buy back GameStop stock, raising the price even more.īut this wasn’t the first time the market saw a short squeeze. And increased demand caused an increase in price. So people rallied together and began buying all the shares they could, whether it was on Robinhood or through their portfolio manager. Retail investors gathered on Reddit and discovered hedge funds were shorting GameStop stock. And Reddit is a social media platform used by people who want to talk about similar interests, including investing. Robinhood (Nasdaq: HOOD) is a newer trading app that allows everyday investors to participate in the market. The most recent big squeeze, it has average investors looking into this (sometimes) profit-producing strategy. One example bringing attention to short squeezes is GameStop. And although there aren’t many real-life examples, they do happen.
Either way, someone is going to profit and someone is going to lose. These could be individual investors or investors in a large hedge fund. Often, but not always, a short squeeze is started by people who know the situation. This causes the price to increase as demand increases. They all start buying shares back to cover their losses. Whatever it may be pushing prices higher, short sellers might need to buy quickly. This can be caused by anything: positive revenue reports, a new acquisition or a new product line.
And that means there’s a lot of risk.Ī short squeeze happens when the price goes up. This means there are a large number of short sellers on a certain stock. Now that we have an understanding of short selling, let’s answer your question: What is a short squeeze? What Is a Short Squeeze?Ī short squeeze comes from a crowded short trade. Because of that, it’s a strategy used mostly by hedge funds (hence the name). This is when an investment is made to help reduce risk in price movements. Overall, you saw a loss of $500 ($2,000 – $2,500 = -$500).Īnother reason to short sell is hedging. You buy back the shares for $2,500 to return to the lender. You buy back 100 shares as quickly as you can, but the stock is worth $25 when you do. Loss: The company releases a great earnings report, and the stock starts to rise. You buy the shares back to return to the lender. You think the price will drop, so you borrow 100 shares. Here’s an example: A company’s stock is trading at $20 a share. Another way to think about this is as the reverse of a normal investment – you’re selling first and then buying it back.
Your short position opens at the sale of the stock and closes when you buy the security back. There are two parts to short selling: selling to open and buying to close. Once the price of shares drops, the investor will buy the shares back and return them to the lender. So they borrow shares and sell them at the current price. Short selling starts when investors think the price of a stock will go down. Short selling is the idea behind a short squeeze. The Lesson Behind Short Squeezes: Short Selling But before we talk about short squeezes, there’s something you need to understand: short selling. After all, it’s not a strategy often used by the common investor. What is a short squeeze? If you, like many investors, saw what happened with GameStop (NYSE: GME), you likely have this question.
0 kommentar(er)
