The Short Squeeze

Thanks to KeyStone Financial:

Looniversity - The Short Squeeze

Ah, the “short squeeze” – while the term may conger up images of your broker’s vertically challenged girlfriend, in the financial world, the term has quite a different meaning. All financial humour aside (thankfully), this week we take a look at the phenomenon known as the short squeeze.

Short Sale

An investor who sells stock short borrows shares from a brokerage house and sells them to another buyer. Proceeds from the sale go into the shorter’s account. He must buy those shares back (cover) at some point in time and return them to the lender.

Short Squeeze

While shorters sell short a stock on the hope that its price will plunge, there is always a chance that its price may begin to rise. If it does so, more and more of these “shorters” will “cover” their investments. That is, they’ll buy back the shares that they had shorted, and take a loss, since they’re now having to buy the shares at a higher price. As more and more shorters do this, the price rises (since more people are buying than selling). In investment parlance, this is a short squeeze.