Short Squeeze
IntermediateA short squeeze is a rapid rise in the price of an asset that forces investors who have bet against it, through short selling, to buy it back to limit their losses, which pushes the price even higher.
Short sellers borrow and sell shares, hoping to buy them back later at a lower price. If the price rises instead, their losses grow, with no theoretical limit. Many must eventually buy back shares to close their positions, either by choice or because their broker demands more margin.
When many short sellers try to buy at once, their buying adds to demand, pushing the price up further and forcing more short sellers to buy. This feedback loop can cause dramatic price spikes.
A famous example occurred in January 2021, when shares of the US video game retailer GameStop, which were heavily shorted, rose more than tenfold within weeks, fuelled partly by retail investors coordinating on social media. Some hedge funds suffered large losses.
Short squeezes are more likely when short interest is high, when days to cover is long and when positive news or buying pressure appears. Prices after a squeeze often fall back sharply once the buying pressure ends.
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