Though a short squeeze can quickly cause the price of a stock to shortly rise in value, these changes in price are rarely driven by the underlying fundamentals of the company. This upward momentum compounds, pushing the price of the stock even higher. This can put regular investors in an advantageous position, driving up the price of a stock to “squeeze” the short sellers, forcing them to buy in to cover their positions. In this situation, short-sellers are still required to close out of their position on their contract expiration date, despite the fact that they will be taking a loss when they buy back the shares they initially borrowed. Say a company’s stock is expected to decline but instead receives a major piece of good news, the price of each share can skyrocket. Ideally, the price of the stocks will fall and the short seller will be able to purchase them back for a reduced cost, return the shares, and keep the profit from the differences between the two prices paid, less interest.Ī short squeeze occurs when a heavily shorted stock rises in value instead of falling. While the short is open, the short seller will pay interest to the lender who provided them with the shares. The short seller will then sell the shares that they borrowed at the current market price. Investors may short a stock on speculation, while hedge funds might use a short position as a form of insurance against a risky position held in the same asset. During a short, an investor will borrow a set number of shares of stock from someone on the market that currently owns them with the promise of returning the shares at a later date. Short selling occurs when investors bet against the price of a security or asset, believing that the price of the asset will decrease in the future.
#SHORT SQUEEZE STOCKS HOW TO#
Best Online Brokers for Trading Short Squeezeīefore we can describe how to make money on a short squeeze, we need to define short selling.
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