What Is a Short Squeeze and How it Works?

The information provided does not constitute, in any way, a solicitation or inducement to buy or sell cryptocurrencies, derivatives, foreign exchange products, CFDs, securities, and similar products. Comments and analysis reflect the views of different external and internal analysts at any given time and are subject to change at any time.

Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.

What Is A Short Squeeze And What Is Going On In GameStop, AMC

Although short squeezes may occur naturally in the stock market the U.S. Securities and Exchange Commission states that abusing short sale practices is illegal. In addition, short sales used to manipulate the price of a stock are prohibited. A short position is when a short seller borrows stock from a brokerage to sell only to buy it back later at a lower price for profit.

During the 2008 financial crisis, Porsche Automobile Holding SE , already a major holder of Volkswagen AG 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.

RSUs vs. Options: Which Is More Lucrative?

Short – Shorting, or short-selling, is when an investor borrows shares and immediately sells them, hoping he or she can scoop them up later at a lower price, return them to the lender and pocket the difference. Past performance does not guarantee future results and the likelihood of investment outcomes are hypothetical in nature. Not an offer, solicitation of an offer, or advice to buy or sell securities in jurisdictions where Candor Financial LLC is not registered. Short Squeeze How they happen, how to spot them, and how to evaluate your risk. Brokerage services for US-listed, registered securities are offered to self-directed customers by Open to the Public Investing, Inc. (“Open to the Public Investing”), a registered broker-dealer and member of FINRA & SIPC. Additional information about your broker can be found by clicking here. Open to Public Investing is a wholly-owned subsidiary of Public Holdings, Inc. (“Public Holdings”).

Short sellers got hammered, collectively losing about $8 billion. Full BioKatharine Beer is a writer, editor, and archivist based in New York. She has a broad range of experience in research and writing, having covered subjects as diverse as the history of New York City’s community gardens and Beyonce’s 2018 Coachella performance.

Short Interest

One of the most famous recent examples of a short squeeze was the massive rise of GameStop stock in 2021. One is the short interest – the percentage of a stock’s total number of shares that are currently held by short sellers. When the percentage of the stock’s total shares that are currently sold short is significantly higher than the normal level, the likelihood of short squeeze is considered to be increased.

• Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
• Small-scale short squeezes may happen any time, for example, after a company reports earrings.
• This information may be different than what you see when you visit a financial institution, service provider or specific product’s site.
• OverboughtOverbought refers to market scenarios where stock is traded considerably higher than its fair value.
• These situations are sometimes called the “mother of all short squeezes” and they can be tremendously lucrative for long investors and ruinous for short sellers.
• Now that we know how to define short squeeze and understand how it works, let’s look at a notable example in history.

However, Volkswagen’s stock peak eventually came to an end, falling by almost 60% in a few short days. https://www.bigshotrading.info/s occur when a highly shorted stock suddenly and quickly increases in price. A stock is shorted when short sellers bet on the stock going down. Successful short squeezes can cause short sellers to lose a lot of money.

Motley Fool Investing Philosophy

At that point it was assumed that the global financial crisis , playing out at the time, would flow into a collapse in demand for automobiles. The catalyst for the short squeeze and imbalance occurred in October 2008, when Porsche announced on Sunday, October 26, 2008 that it had accumulated an economic interest of approximately 74% of the stock in Volkswagen. With a fixed shareholding of 20%, due to the ‘Volkswagen Act’ from the German state of Lower Saxony, this meant there was only a free float of 6% of stock available versus 12% short interest held by short sellers. As the Great Financial Crisis hit in 2008, causing car manufacturing to plummet, many more institutional traders joined the short-selling frenzy, expecting the stock price to crash. This was exacerbated after Porsche vehemently denied rumors in early 2008 that it would increase its holding to 75%. However, in October 2008, Porsche revealed that it had held 42% of VW shares and had options on a further 31%.

The short interest ratio, also known as days to cover, is the stock’s total number of shares sold short divided by the stock’s average daily trading volume equal to the total number of days to cover or close the position. The short interest ratio shows the average number of days needed to exit a short position. While a low short interest ratio shows a lower average of days needed to cover a position, a high short interest ratio shows the opposite. A high short interest ratio can be an indicator of a short squeeze. In the stock market, a short squeeze is a rapid increase in the price of a stock owing primarily to an excess of short selling of a stock rather than underlying fundamentals. A short squeeze occurs when there is a lack of supply and an excess of demand for the stock due to short sellers having to buy stocks to cover their short positions.