What Is A Short-Squeeze?
As shares in AMC and GameStop continue to rise, many investors are wondering what exactly a short-squeeze is?
Aug. 2, 2021

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

The Home of Successful Investing.

© 2024 MyWallSt Ltd. All rights reserved.







This website is operated by MyWallSt Ltd (“MyWallSt”). MyWallSt is a publisher and a technology platform, not a registered broker-dealer or registered investment adviser, and does not provide investment advice. All information provided by MyWallSt Limited is of a general nature for information and education purposes, and you should not construe any such information as investment advice. MyWallSt Limited does not take your specific needs, investment objectives or financial situation into consideration, and any investments mentioned may not be suitable for you. You should always carry out your own independent verification of facts and data before making any investment decisions, as we cannot guarantee the accuracy or completeness of any information we publish and any opinions that we publish may be wrong and may change at any time without notice. If you are unsure of any investment decision you should seek a professional financial advisor. MyWallSt Limited is not a registered investment adviser and we do not provide regulated investment advice or recommendations. MyWallSt Limited is not regulated by the Central Bank of Ireland. MyWallSt Limited may provide hyperlinks to web sites operated by third parties. Your use of third party web sites and content, including without limitation, your use of any information, data, advertising, products, or other materials on or available through such web sites, is at your own risk and is subject to the third parties' terms of use.