Posted in Finance, Accounting and Economics Terms, Total Reads: 90
Definition: Short Squeeze
Short Squeeze is the position where the price of stocks started rising drastically due to increase in the demand and the supply is reduced drastically. As people stop selling the stocks and more people want to buy the stock thus it leads to increase in the price of the stock.
Short sellers are the investors who sell the stocks that don’t belong to them in order to repurchase later. They mainly do this because they believe the stock price will fall in future so they will repurchase it when the prices are low and earn profit on the difference in selling and repurchasing the stock. They aim for short period profits as they have to repurchase the stocks as they have to return them to the owner.
Short Squeeze happen when these short sellers expect the prices to fall but it rises instead. Thus this creates problem for them as the stocks are not owned by them and they have to be returned. So the investor will also try to reduce his losses and also have to repurchase the shares. So there are many short sellers in the market and as soon as the prices started to increase all the short sellers try to purchase the stocks as they want to minimize the loss as much as possible so this creates pressure on the market as no one is ready to sell the shares but the short sellers have to repurchase them as they have to cover the position. Thus this lead to more increase in prices of the stocks
For example, a short seller sells the share of XYZ Company for Rs. 200 and he expected a fall in prices but the prices rise to Rs.300 instead so the short seller makes a loss of Rs100.
Short squeeze can be caused due to various reason but mainly it is due any news that is announced by the company and it is good for the company thus it increases the share price of the company. Thus these short squeeze sellers are very price sensitive.