For wealth managers, understanding the dynamics of short squeezes is essential for effective portfolio management and risk mitigation. The Financial Industry Regulatory Authority (FINRA) and stock exchanges such as the New York Stock Exchange and NASDAQ publish updated information about short positions in publicly traded companies twice a month. After the initial meme stock craze, GameStop shares drifted steadily lower, settling at just over $10 a share by the Spring of 2024. However, in mid-May of that year, the stock suddenly skyrocketed once again after Keith Gill, also known as “Roaring Kitty,” resurfaced on social media after a three-year hiatus.
- In May 2024, the shares surged again after a social media post from the trader that’s credited with igniting the meme stock craze.
- Short-sellers enter the market with a belief that a company and its stock price are overvalued.
- If this occurs, it’s the short sellers who profit and the regular shareholders who incur huge losses.
- Traders and investors who aim to capitalize on the potential gains from a short squeeze must employ effective strategies to navigate such volatile market conditions.
- While short squeezes of GameStop, along with other meme stocks like AMC Theatres and Blackberry, made headlines in 2021, many stocks that are heavily shorted actually do go on to plummet.
When the stock price reaches a certain level, short sellers may be forced to cover their positions to avoid further losses. Short squeezes can grab the imagination of the investing public because of the potential for quick money and the chance to participate in the Wall Street action. hear that its your taken profit. GameStop is one of the most high-profile short squeezes of the recent past. The trading action gripped investors (and arguably still does) as the stock remains at an elevated price long after the immediate short squeeze. 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.
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Short selling is a finance practice in which an investor, known as the short-seller, borrows shares and immediately sells them, hoping to buy them back later (“covering”) at a lower price. However, an unexpected piece of favorable news can cause a jump in the stock’s share price, resulting in a loss rather than a profit. Short-sellers might then be triggered to buy the shares they had borrowed at a higher price, in an effort to keep their losses from mounting should the share price rise further. The Volkswagen short squeeze had significant consequences for the market and investors. The stock price surged over a few days, rising more than tenfold, making Volkswagen briefly the most valuable company in the world by market capitalization. Many hedge funds and institutional investors suffered substantial losses as they were caught in the short squeeze and struggled to cover their positions.
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The stock of theater chain AMC has also been the subject of a short squeeze, though not as prominently as GameStop. Some have suggested that Tesla has been subject to a years-long short squeeze, given its high short interest and massive overvaluation, relative to competition. Mercedes Barba is a seasoned editorial leader and video producer, with an Emmy nomination to her credit. Presently, she is the senior investing editor at Bankrate, leading the team’s coverage of all things investments and retirement. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.
Short squeezes can lead to significant losses for short sellers, while providing potential gains for long investors. Your potential losses are unlimited, yet your potential returns are limited. The most you can earn is the difference between the price you sell your borrowed shares for and the price you pay to buy them back. When you short a stock, you’re essentially borrowing shares using a margin account. You then immediately sell the borrowed shares in hopes that the share price will drop.
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A short squeeze also figures prominently in the plot of the classic film “Trading Places.” In the film the main characters “put the squeeze” on orange juice commodity futures. The stock’s momentum built on itself, and by the end of the month the stock had soared to more than $120 intraday – up some 60 times in price from just months before. While high-profile squeezes get a lot of press when buy bitcoin online with credit card they occur, many stocks experience short-lived squeezes throughout a typical year as longs and shorts battle back and forth. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.
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GameStop’s stock price surged due to a short squeeze on major hedge funds that were short the stock and forced to sell to cut losses. Everyone who shorted the stock between $9 and $5 is now in a losing position. Those who sold short near $5 are facing the biggest losses and will be frantically looking to get out because they are losing 80% of their investment.
This can be triggered by several factors, including high short interest, positive news, or a sudden increase in demand. There are no regulations that dictate the time limit for when a short seller has to close out their position. However, if you’ve shorted a stock in your account, in some cases, your broker may require you to do so, which means you’ll have to buy back the stock at the current market price. When a stock is thinly traded or heavily shorted, this can trigger a short squeeze, as many investors have to close out their positions at once.
