Short squeeze

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A short squeeze is a rapid increase in the price of a stock that occurs when there is a lack of supply and an excess of demand for the stock.[1]

Short squeezes result when short sellers cover their positions on a stock, resulting in buying volume that drives the stock price up. This can occur if the price has risen to a point where short sellers must make margin calls, or more loosely if short sellers simply decide to cut their losses and get out. This may happen in an automated manner for example if the short sellers had previously placed stop-loss orders with their brokers to prepare for this possibility. Since covering their positions involves buying shares, the short squeeze causes an ever further rise in the stock's price, which in turn may trigger additional margin calls and short covering.

Short squeezes are more likely to occur in stocks with small market capitalization and small floats, although can involve large stocks and billions of dollars, as happened in October 2008 when a short squeeze temporarily drove the shares of Volkswagen on the Xetra DAX from 210.85 to over €1000 in less than two days, briefly making it the most valuable company in the world.[2][3] Short squeezes may also be more likely to occur when a large percentage of a stock's float is short.[4]

The opposite of a short squeeze is the less common long squeeze.

This can also apply to futures contracts.[5]

See also[edit]

References[edit]

  1. ^ Short Squeeze
  2. ^ Gow, David (29 October 2009). "Porsche makes more VW stock available to desperate short-sellers". The Guardian. 
  3. ^ Krstić, Ivan (7 January 2009). "How Porsche hacked the financial system and made a killing". Archived from the original on 2010-08-15. Retrieved 2010-11-25. 
  4. ^ "Short Squeezes". Investors Underground. Retrieved 11 November 2016. 
  5. ^ Thomas, John (13 September 2010). "A Short Squeeze In Corn May Hit The Market". OilPrice.com. 

External links and sources[edit]