A short squeeze is an uncommon situation in the stock market that causes the price of a stock or any other security to increase rapidly. A short squeeze can occur if the security concerned has many traders short on it and suddenly there is an unexpected price surge in it. Due to this unexpected rise, panic sets among the short-sellers, and all of them suddenly start to cut their losses and cover their position by buying at any given price. This causes the price of the security concerned to increase rapidly within a small time.
Short-sellers sell shares of a security that they think will decrease in value in order to purchase them later. If they are correct, they buy the shares back and earn the difference between the price at which the short was started and the actual selling price. If they are incorrect, they must purchase those shares at the increased price and pay the difference between the price they earlier sold the shares and the price at which they now buy them.
Short trades are intraday trades. This means that the sellers have to cover their positions on the same day they took the trades. So if the price of a security suddenly increases, short-sellers may need to move quickly to minimize their losses. Because short-sellers cover their holdings with purchase orders, their simultaneous escape pushes prices upward. The security’s continuing fast price increase also attracts the attention of new buyers. The combination of fresh purchasers and frightened short-sellers results in a spectacular and unprecedented price increase which is referred to as a short squeeze in the technical language of the stock market.
