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What Is The Short Squeeze?

Views 64442022.12.30
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Key Takeaways

The story of GameStop was dubbed an "epic short squeeze" in January 2021.

If the share price rises instead of falls as short-sellers expected, those with short positions would lose money and even be forced to close their positions. When short sellers have to buy back shares to cover their shorts continuously, the demand for the stock would exceed the supply, driving the price even higher. This situation is known as the "short squeeze".

You might have heard about the story of GameStop if you started investing in stocks before 2021.

In January 2021, GameStop (GME), a consoles retailer in America, was heavily shorted by many hedge funds due to its non-profitability and the pandemic.  

Yet shortly after, a user on the Wallstreetbets, a Reddit message board, urged retail investors to buy in GME, pushing its share price up against aggressive short-sellers.

The frenzy climaxed when numerous celebrities, notably Elon Musk, expressed their support for the movement on Twitter.

Apart from GME, other heavily-shorted stocks, including Theatres (AMC) and Blackberry (BB), also saw their share prices surging.

On January 28, 2021, GME's share price spiked to a peak of over $483, roughly 190 times the lowest $2.57,

costing the hedge funds billions of dollars. So this movement was dubbed an "epic short squeeze" by the media.

We've already known short-sellers can often profit from a price decline.

But if the share price rises instead of falls as expected,those with short positions would lose money,and even be forced to close their positions.

When short sellers have to buy back shares to cover their shorts continuously,the demand for the stock would exceed the supply, driving the price even higher.

This situation is known as the "short squeeze".

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