What Is A Short-Squeeze?

This year, shares of AMC Entertainment (NYSE: AMC), GameStop (NYSE: GME), and more have soared on seemingly unqualified metrics. That leaves us asking the question, were these gains justified or are such stocks caught up in massive short-squeezes?

But, before we get into what happened to these stocks...

...what exactly does short selling mean?

Short selling is basically betting against a stock. Investors believed that AMC stock would fall given that cinemas were forced to close during the pandemic.

Therefore, when retail investors drove the stock price up over the last few months, many hedge funds had to cover their losses which resulted in the stock skyrocketing. This is what is known as a short-squeeze.

What is a short-squeeze?

From the Investopedia definition:

"A short squeeze is an unusual condition that triggers rapidly rising prices in a stock or other tradeable security. For a short squeeze to occur the security must have an unusual degree of short-sellers holding positions in it. The short squeeze begins when the price jumps higher unexpectedly. The condition plays out as a significant measure of the short sellers coincidentally decide to cut losses and exit their positions."

The usual victims/beneficiaries of such events are the so-called 'meme stocks', like GameStop and AMC, which have been boosted by massive popularity on Reddit and fintwit, leading to masses of retail investors and traders buying up swathes of their stock.

AMC stock, and other companies popular on Reddit's WallStreetBets, have been rising, often in quadruple digits, over the past six months.

Should I buy meme stocks?

If a serious investor was asked "Should I buy meme stocks?" a few months ago, the obvious answer would have been no. Things have changed slightly since then and there are now actually worthy companies like DraftKings (NASDAQ: DKNG), Lemonade (NYSE: LMND), and Chinese-owned NIO(NYSE: NIO) being caught up in the meme stock craze.

This has puzzled many people and encouraged some to consider buying shares in the hopes that they will make a tidy profit when the stock goes through a short-squeeze.

However, this type of investing is very risky and should be avoided by investors that are not able to stomach severe volatility. You can read much more about investing in meme stocks here.

So how exactly do you figure out hot air from real potential? Check out MyWallSt's full list of high-growth stocks (including one or two meme stocks mentioned above) by starting your free access now.

Disclaimer: MyWallSt does not condone short-squeeze trading of meme stocks or any other stocks. 

MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.