Short squeeze Wikipedia

Another iconic example is the Volkswagen (VOWG) short squeeze that occurred in 2008, during the global financial crisis. This event demonstrated how a combination of factors, including a takeover bid and limited available shares, can lead to an unprecedented surge in a stock’s price. Short squeezes are not random events; they are triggered by specific market conditions and indicators.

Short Squeeze

The GameStop short squeeze had substantial implications for both the market and investors. As the stock price skyrocketed, short sellers were forced to cover their positions, leading to significant losses for some hedge funds. The short squeeze also highlighted the potential power of retail investors when organized and united, challenging the dominance of institutional investors in the market. This term, often mentioned in financial news headlines, refers to a compelling market situation where short sellers find themselves trapped as the stock price rapidly rises, forcing them to cover their positions. The result was not only retail investors continued investments in GameStop stock and call options, but also a major increase in GameStop stock price in a matter of days. On January 27, 2021, GameStop’s share price rose to $347.21, with a brief peak of $483 per share.

How does a short squeeze impact short sellers?

The short seller will then sell the stock and hold onto the proceeds in the margin account as collateral. If the stock’s price has dropped, the short seller makes money due to the difference between the price of the stock sold on margin and the reduced stock price paid later. However, if the price goes up, the buyback price could rise beyond the original sale price, and the short seller will have to sell it quickly to avoid even greater losses. Contrarian investors may buy stocks with heavy short interest to exploit the potential for a short squeeze. A technologies for game developers rapid rise in the stock price is attractive, but it is not without risks.

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The collapse of Silicon Valley Bank in March 2023 illustrated several types of squeezes. First, the bank faced a profit squeeze due to poor returns from its investment portfolio. Notice that all of the stocks on the left have been behaving very strangely in terms of rapid up-and-down movements in the recent short-squeeze environment.

What Is Short Selling?

These concerns may cause banks to be more reluctant to lend out money within the interbank market. The term squeeze is used liberally in finance and business and describes various situations in which people are realizing losses, taking gains, or finding credit difficult to obtain. Anyone who buys in hopes of a short squeeze should have other (and better) reasons to think that the price of the stock will go higher. The purpose of this website is solely to display information regarding the products and services available on the Crypto.com App. You may obtain access to such products and services on the Crypto.com App.

Short Interest

Chewy cofounder Ryan Cohen and Scion Asset Management’s Michael Burry both took long positions on GME, and Cohen became the chairman of GME’s committee to shift to e-commerce. Our writing and editorial staff are a team of experts holding advanced financial designations beaxy exchange review and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Finance Strategists has an advertising relationship with some of the companies included on this website.

A short squeeze can seemingly happen suddenly with price rising parabolically. alpari forex broker review But often short squeezes are fueled by unusually high short interest in the underlying security. When something happens which drives the price of the stock up, the short sellers rush for the exits all at once, attempting to buy to close their positions. This adds fuel to the force propelling the stock price higher and irrationality sets in. What happened to Game Stop’s share price in 2021 is a good example of a short squeeze in action.

If the investor is correct and the share price has indeed declined, let’s say to $70, then the investor will make $30 in profit. They sold borrowed shares for $100, repurchased them for $70, returned the shares, and pocketed the difference. When an investor decides to short a stock, they are betting that the price will decline in the short term. But if the opposite occurs, the only way for them to close their position is to go long by purchasing shares of the stock. This can cause the stock’s price to further increase, resulting in further action by short sellers.

• As the financial crisis continued, the short interest in the Volkswagen company increased, which is the number of Volkswagen shares that had been sold short but not completed or closed out.
• Let’s explore the factors that contribute to the occurrence of a short squeeze and the technical indicators that can provide insights into this market phenomenon.
• This is often a result of factors like positive news or market sentiment, but can also stem from other factors, such as technical indicators or large institutional purchases.
• The immediate impact of a short squeeze on Bitcoin is a sharp and often rapid increase in its price.
• The latter is the basic idea underpinning a short squeeze — but more on that later.
• Also, looking at the Volkswagen chart above, notice the price went down nearly as fast as it went up.

When a heavily shorted stock unexpectedly rises in price instead, the short sellers may have to act fast to limit their losses. The potential loss in short selling is theoretically unlimited because a stock’s price can rise indefinitely, whereas the maximum profit is capped since the stock can only fall to zero. For stocks with truly massive amounts of short interest relative to the volume of available shares, this effect can snowball for some time, leading to tremendous volatility and huge spikes in the share price.

Alternatively, short sellers simply deciding to cut their losses and get out (rather than lacking collateral funds to meet their margin) can cause a squeeze. Short squeezes can also occur when the demand from short sellers outweighs the supply of shares to borrow, which results in the failure of borrow requests from prime brokers. This sometimes happens with companies that are on the verge of filing for bankruptcy. During the 2008 financial crisis, Porsche Automobile Holding SE (POAHY), already a major holder of Volkswagen AG (VWAGY) shares, increased its total stake in Volkswagen to about 75%. The state of Lower Saxony also owned more than 20% of the company, leaving few remaining shares available to trade at a time when the stock was being heavily shorted.

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