A short squeeze is a situation which arises when the value of a stock starts to go up radically, putting pressure on short sellers and leading to a situation in which there are not enough shares of the stock available to meet the demand. Short squeezes can occur in a wide variety of markets and they usually happen because of a news item or political event which has made stock traders nervous or restless. For short sellers, a short squeeze can be a catastrophic turn of events which results in large losses.
Short squeezes usually happen when the cost of a stock starts to rise and short sellers rush to cover their positions. Some short sellers may move because they fear taking a large loss on the stock, while others may be forced to move because they have exceeded their trading margins and they want to avoid a margin call from their brokers. As more and more short sellers clamor to buy shares of the stock, the price goes up and keeps climbing.
Some people can profit from a short squeeze, if they know how to play their cards right and they can recognize the early signs of a short squeeze. These individuals get in while the price of the stock is relatively cheap, and then sell when it reaches an unusually high price. Short squeezes can last several hours or several days, depending on the stock and the situation, and it takes a very canny investor to move on the right stock at the appropriate moment.
Undercapitalized stocks tend to be especially vulnerable to short squeezes, but any stock can potentially get involved in this classic stock market situation. Once the short squeeze begins, usually a cascading series of events perpetuates it, ensuring that the stock's value will rise radically and very quickly. The rise in value usually has no direct correlation with what is going on at the company, and in fact companies in very poor financial condition can be involved in a short squeeze.
The opposite of a short squeeze is a long squeeze, in which investors start to dump shares of a stock because they are concerned that it is not going to perform, thereby driving the price down because the market becomes glutted with shares of that stock. It can be tempting to divest stocks when their value starts to decline, but investors should think about the fact that they can contribute to a long squeeze by doing this, and it may be more beneficial to retain shares of a stock on the understanding that it will eventually go up in value.