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Short squeeze: What is it and who produces it?

We often hear about “short squeeze” in financial markets. What is a short squeeze?

To fully understand what a short squeeze is, one needs to know who the short sellers are and what they do.
In the markets you can buy stocks, indexes, commodities and more but you can also sell all these instruments while not owning them.
When you sell something without having possession of it, you are said to be selling “short.”

How can you sell short?

A series of traders borrow shares, paying interest on them, and then sell them. So they manage to sell something that is not theirs but has been lent to them by paying interest.

Why do you sell short? Simply because you think of a bearish market movement and thus hope to profit by selling various assets.

So short sellers point to a bearish market. They tend, therefore, to lower the prices of their stocks, or sold assets and then buy them back at a lower price so as to square up.

If short sellers are many and together aim to sell short they can also cause a sudden drop in a stock, but what happens after such a powerful short? Often the price is bought back because it is much lower than before, and many who are short tend to close their short positions for fear of loss.

And here we come to the short squeeze: i.e., a veritable mass short squeeze of short sellers.

In a nutshell, a short squeeze it occurs when a stock’s rise is such that it convinces a large number of short sellers to close their bearish sales. or to hedge by going to buy the underlying. As a result, the stock or asset in question undergoes a sharp rise that further deters other short sellers from entering short on the stock. This process is amplified by leverage and the use of options in the markets.

Concrete examples of short squeeze we have seen on GAME STOP and most recently on AMC Entertainment. The stock listed on the NYSE reached its new all-time high last week due to Rebbit’s retail investor rush on the stock.

Massive buying drove the price up and created a short squeeze on the stock that caused many short positions in place to close. This implemented the rise of the stock.

Needless to say, it is very dangerous to enter stocks that are undergoing short squeezes. Catching a runaway train is always difficult and a lot of risk is involved.

Unfortunately, people who do not know the financial markets jump into these bull runs on stocks just because they see the price going up and want to try to make a profit too. The problem is that in these cases the entry is often made late and the person enters the market when by then the market has already been “short squeezed.” The problem here is that always, or almost always, then the price of the stock returns to its original values, and the loss suffered by the last speculator is often high.

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