What is a short squeeze and its impact on meme stocks?
Highflying meme stock investors are holding their breath hoping for a short squeeze – the tipping point that’ll send their shares to the moon… But what is a short squeeze?
Back to the basics: what is shorting? Shorting is a method used to bet on a stock price falling. To bet on a stock rising, you simply buy the stock and hold it. Betting on a stock falling is more difficult…
To short (unavailable to most retail investors), you “borrow” the stock from someone, sell it and then buy it back later.
- If the stock price falls, you buy it back at a cheaper price when returning the stock – making a profit on the short.
- If the stock price rises, the investor shorting would have lost money having to buy back the stock at a higher price.
The fun part – what is a short squeeze: This happens when a stock jumps unexpectedly – forcing investors to cover their short positions by buying back the stock – which sends the price even higher.
- Squeezes are rare but they do happen. There’s also no way telling when a stock is being squeezed.
The Reddit/meme strategy: Bet against the most shorted stocks, in the hopes of a massive short squeeze.
- If a stock has a lot of short positions (i.e. high short interest), the stock has the potential to rise more… the reason why some of the most controversial businesses are among Reddits’ favorites.
Dive Deeper: How did this impact meme stocks like AMC?