What is a stock squeeze?
In the financial world, the term squeeze is used to describe situations wherein short sellers purchase stock to cover losses or when investors sell long positions to take capital gains off the table.
What are the causes of a profit squeeze?
The underlying causes of a profit squeeze are numerous but commonly consist of increased competition, changing governmental regulations, and expanding producer and supplier power. A credit squeeze describes any situation where it becomes difficult to borrow money from banking institutions.
How to identify stocks at risk of a short squeeze?
Two measures useful in identifying stocks at risk of a short squeeze are short interest and the short interest ratio. Short interest refers to the total number of shares sold short as a percentage of total shares outstanding. The short interest ratio is the total number of shares sold short divided by the stock’s average daily trading volume.
Are short sellers being squeezed out of stocks?
Short sellers are being squeezed out of their positions, usually at a loss. Short sellers zero in on a stock that they think is overvalued by the market. For example, Tesla captured the enthusiasm of many investors with its innovative approach to producing and marketing electric vehicles.
What triggers a stock squeeze?
Short squeezes are typically triggered either by unexpected good news that drives a security's price sharply higher or simply by a gradual build-up of buying pressure that begins to outweigh the selling pressure in the market.
What does it mean when a stock will squeeze?
The term squeeze can be used to describe several situations that involve some sort of market pressure. In finance, the term is used to describe situations wherein short-sellers purchase stock to cover losses or when investors sell long positions to take capital gains off the table.
How do you tell if a stock is going to squeeze?
Scanning for a Short SqueezeThe number of shares short should be greater than five times the average daily volume.The shares short as a percentage of the float should be greater than 10%The number of shares short should be increasing.
What happens after a short squeeze?
When this happens, the stock is being bought up and the shorts are now forced to cover their positions (getting squeezed out), which then results in more buying, causing the stock to go up very quickly and by a lot. You can find short information on stocks through most financial sites like Yahoo and Google Finance.
What was the biggest short squeeze in history?
Volkswagen stockWhat Was the Bigggest Short Squeeze in History? The biggest short squeeze in history happened to Volkswagen stock in 2008. Although the auto maker's prospects seemed dismal, the company's outlook suddenly reversed when Porsche revealed a controlling stake.
How do you profit from a short squeeze?
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.
Is a heavily shorted stock good?
Heavily Shorted Stocks Aren't Good Investments. The overall opinion in the investing community is that the value of the stock is going to fall. Buying shares in stocks like these is asking for losses if a positive catalyst does not take place.
How do you tell if a stock is heavily shorted?
For general shorting information about a company's stock, you can usually go to any website with a stock quote service. For more specific short interest info, you would have to go to the stock exchange where the company is listed.
How long does short squeeze last?
Takeaway #1: Short squeezes typically don't last long. The Volkswagen short squeeze took the longest amount of time to climax at 31 trading days. The average short squeeze in this data set lasted approximately 12 days from the onset to the peak.
What is the most shorted stock right now?
Most Shorted StocksSymbol SymbolCompany NameFloat Shorted (%)RDBX RDBXRedbox Entertainment Inc.46.23%PMVP PMVPPMV Pharmaceuticals Inc.42.64%FUV FUVArcimoto Inc.42.04%CONN CONNConn's Inc.41.78%42 more rows
Is a short squeeze good for investors?
Speculators and traders who have short positions in a stock will face heavy losses if the stock undergoes a short squeeze. Contrarian investors who have built up long positions in the stock in anticipation of a short squeeze will benefit as the stock price climbs.
What are the most heavily shorted stocks?
Citi Trends, Inc. Beyond Meat, Inc. Heron Therapeutics, Inc.
What happened to GameStop stock in 2021?
In January 2021, a virtual post on a page of the online forum Reddit's subreddit channel r/wallstreetbets caused a short squeeze of the video game company GameStop's stock. The stock reached a pre-market value of more than $500 per share, which had multiplied over 30 times since its starting stock price of $17.25. Cumulatively, GameStop's short sellers lost $5.05 billion .
What are the different types of squeezes?
Several types of squeezes—including profit squeezes, credit squeezes, short squeezes, long squeezes, and bear squeezes —are explained below. Squeeze situations are often accompanied by feedback loops that can make a bad situation worse.
Why do long squeezes happen?
This normally happens because investors place a stop-loss order to mitigate risk and ensure they are protected against any price declines.
What is liquidity squeeze?
A liquidity squeeze occurs when a financial event sparks concerns among financial institutions (such as banks) regarding the short-term availability of money. These concerns may cause banks to be more reluctant to lend out money within the interbank market. As a result, banks will often impose higher lending requirements in an effort to hold onto their cash reserves. This cash hoarding will cause the overnight borrowing rate to spike significantly above its benchmark rate, and as a result, the cost of borrowing will increase.
What is squeeze in finance?
The term squeeze can be used to describe several situations that involve some sort of market pressure. In finance, the term is used to describe situations wherein short-sellers purchase stock to cover losses or when investors sell long positions to take capital gains off the table.
What is a profit squeeze?
A profit squeeze is realized by a business when its profit margins have decreased or are decreasing. This type of squeeze happens when a company's revenue declines or its costs rise. The underlying causes of a profit squeeze are numerous but commonly consist of increased competition, changing governmental regulations, and expanding producer and supplier power.
What happens when you short a stock?
When an investor decides to short a stock, he is betting the price declines in the short term. If the opposite occurs, the only way to close the position is to go long by purchasing shares of the stock. This causes the stock's price to further increase, resulting in further action by short-sellers.
Finding Stocks with Short Squeeze Potential
When I look for stocks with the potential of a short squeeze, I am looking at two specific things.
Putting it Together
In this scenario, if the stock had ratios of 10 days to cover and short percentage of float of 30%…it’s sitting with a really high concentration of short interest, which puts a lot of pressure on the stock at key levels.
Why do contrarians buy stocks?
Contrarian investors may buy stocks with heavy short interest in order to exploit the potential for a short squeeze. A rapid rise in the stock price is attractive, but it is not without risks. The stock may be heavily shorted for good reason, such as a dismal future outlook.
How much did Medicom stock jump to?
Then, the news comes out that Medicom’s drug works better than expected. Medicom’s shares jump to $9, as speculators buy the stock and short-sellers scramble to cover their short positions. Everyone who shorted the stock between $9 and $5 is now in a losing position.
Why is naked shorting important?
Naked shorting still happens thanks to discrepancies that exist between electronic and paper trading. Naked shorting can help exacerbate short squeezes by allowing for additional shorting that might otherwise not exist. Naked short selling, on one hand, is said to help balance the market.
What are the measures of short squeeze?
When measuring short interest, two measures that are useful when identifying stocks at risk of a short squeeze are short interest and the short-interest ratio. Short interest is the total number of shares sold short as a percentage of total shares outstanding.
How long does it take to buy back Medicom?
The short-interest ratio, also called days to cover, means that it will take five days for short-sellers to buy back all Medicom shares that have been sold short. Assume that because of the huge short interest, Medicom had declined from $15 a few months ago to $5.
What is short squeeze?
A short squeeze is an unusual condition that triggers rapidly rising prices in a stock or other tradeable security. For a short squeeze to occur the security must have an unusual degree of short-sellers holding positions in it. The short squeeze begins when the price jumps higher unexpectedly.
Why is GameStop a short seller?
GameStop, due to a rise in competition and decline in foot traffic at malls, became a target of short-sellers. The short interest had grown to over 100% of the shares outstanding. Then a bull case for the company—that it could return to profit in a couple of years—started getting around in early 2021.
What happens if shares of NoGood increase?
If the shares of NoGood instead increase in price, then the short seller is at risk of losing a very large amount of money on the trade. (Unlike price declines, which are capped when the share price reaches $0, price hikes are theoretically limitless.)
How much was Volkswagen worth in 2008?
In 2008, Volkswagen saw its stock price jump by more than 300% in a matter of days, briefly making the company seemingly worth more than $400 billion -- above the valuation of any other public company at the time. In Volkswagen's case, a number of factors contributed to the squeeze.
Is short squeeze a long term strategy?
Even in a best-case scenario, a short squeeze is a quick occurrence — not a long-term strategy. Buying into a company in the hope of lassoing a rocketing price is speculative at best. Not all stocks with high short interest get squeezed.
Can you sell what you don't own?
Of course, you can't simply sell what you don't own with no consequences -- at some point, those borrowed shares have to be returned. When that day comes, the investor needs to buy shares in the market to be able to return them to the lender.
What does it mean when you see a big short interest?
Usually when you see a big short interest, it means big investors are betting against it, like hedge funds. For whatever reason, they're betting against it. Normally, it's a legitimate reason. They think it's overvalued, they think the business is going to be in decline.
Where is Matt from Motley Fool?
Matt is a Certified Financial Planner based in South Carolina who has been writing for The Motley Fool since 2012. Matt specializes in writing about bank stocks, REITs, and personal finance, but he loves any investment at the right price. Follow him on Twitter to keep up with his latest work!
Who has no position in any of the stocks mentioned?
Jason Moser has no position in any of the stocks mentioned. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
What Is A Squeeze?
How Squeezes Work
- The term is used liberally in finance and business and describes any situation wherein people are realizing losses, taking gains, or finding credit financing difficult. Several types of squeezes—including profit squeezes, credit squeezes, short squeezes, long squeezes, and bear squeezes—are explained below.
Types of Squeezes
- Profit Squeeze
A profit squeeze is realized by a business when its profit margins have decreased or are decreasing. This type of squeeze happens when a company's revenue declines or its costs rise. The underlying causes of a profit squeeze are numerous but commonly consist of increased co… - Credit Squeeze
A credit squeeze describes any situation where it becomes difficult to borrow money from banking institutions. This type of squeeze normally happens when an economy is in a recession or when interest ratesare rising. The issuance of bad debt, such as in the case of the 2008 finan…
Other Types of Squeezes
- A liquidity squeezeoccurs when a financial event sparks concerns among financial institutions (such as banks) regarding the short-term availability of money. These concerns may cause banks to be more reluctant to lend out money within the interbank market. As a result, banks will often impose higher lending requirements in an effort to hold onto their cash reserves. This cash hoar…
Examples of Squeezes
- GameStop Short Squeeze
In January 2021, a virtual post on a page of the online forum Reddit's subreddit channel r/wallstreetbets caused a short squeeze of the video game company GameStop's stock. The stock reached a pre-market value of more than $500 per share, which had multiplied over 30 times sin… - Great Depression Credit Squeeze
The stock market crash of 1929 caused an air of frenzy in the United States. The first bank runs occurred in the fall of 1930 in Nashville when account holders ran to withdraw all of their funds at once from the bank.2Quickly, this credit squeeze spread across the U.S., causing many banks t…
The Bottom Line
- Squeezes describe types of financial and economic situations in which market pressures cause profits to decline or market momentum leads to a quick domino effect in which a lot of money is lost or made at once. As history has displayed, squeezes display just how sensitive financial markets are, from the Great Depression to GameStop in the 21st century.