What is a Short Squeeze in Stocks? Definition, Causes, and Examples

Short Squeeze is an action that allows traders to profit from a decline in the value of any asset. This is a phenomenon that occurs frequently in the financial market in general and the crypto market in particular.

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What is a Short Squeeze in Stocks?

Short Squeeze is a common concept and can be seen as a phenomenon that occurs frequently in the financial market in general and the crypto market in particular. Accordingly, this phenomenon will occur when stock prices, coin prices or any other asset suddenly increase sharply, forcing many short sellers to end their selling positions to cut losses.

This phenomenon will create additional upward pressure on prices for the particular asset class involved and at the same time cause a buying frenzy in that asset class. To put it more succinctly, this is an action that allows traders to profit from a decrease in the value of any asset.

Because of the value that the Short Squeeze phenomenon brings, this is a very popular way to manage risk when the market continuously declines in price. On the other hand, many investors also use this phenomenon as a way to protect their holdings and show the prospect of price declines in the market.

An obvious and most famous example of the Short Squeeze phenomenon is Keith Gill‘s actions when buying GameStop shares.

How does Short Squeeze work?

To describe how the Short Squeeze phenomenon works, here’s a simple example for you:

• Investor A bets on the price of a certain asset falling by shorting the asset and profits when the asset falls.
• Investor B bets that the price of the asset that investor A shorted will increase and buys it, causing the asset’s price to increase sharply.

So it was the actions of investor B that forced investor A, who was selling short to buy back the sold assets to close the position. This very action will also cause a buying fever, which we talked about before.

The Short Squeeze process mentioned above will end when the price of the invested asset begins to decrease and the short-selling investors, here investor A, begin to buy back the asset to close the position. This practice will continue until the number of assets to be acquired is large enough, the demand for purchasing, and the price of that asset has decreased.

One thing to note is that this phenomenon may last longer if investor B continues to buy to push the price of investment assets even higher. This will force investor A to close the position and suffer a certain additional loss.

How do you recognize Short Squeeze?

From what we learned earlier, you probably understand that if the Short Squeeze phenomenon occurs, it can cause investors to suffer heavy losses. Therefore, recognizing when this phenomenon is about to happen is extremely important to limit the risks it brings.

Signs you may notice include:

• The price of the invested asset suddenly increases very quickly for no apparent reason.
• The sharp increase in trading volume in a short time is associated with an increase in the value of the asset.
• High short-interest ratio between the number of assets being sold and the number of assets in circulation.
• A lot of positive information about projects and assets has been posted.

In case you notice any of the above signs, it is a sign of the upcoming Short Squeeze phenomenon. Some information related to Short Squeeze that you can read more: Roaring Kitty, SEC

What should you do when facing Short Squeeze?

If you are a new investor and have never faced a Short Squeeze situation and do not know how to deal with this phenomenon, here are some suggestions for you:

• Research thoroughly before investing in any asset.
• Establish an investment plan that includes goals, strategies, and the amount of capital invested thoroughly.
• Leverage technology with risk management tools.
• Proactively adjust your investment plan if there are market fluctuations.
• Regularly monitor market conditions and news related to the project you are investing in.

Conclusion

Finally, we have learned together the concept of Short Squeeze as well as how to recognize and face it. Hope we have helped you understand more about this concept and see you again in other content from AZcoin.