Why is everyone talking about Short Squeeze? Find out!

From poor sales results to overvaluation, out of nowhere! Read the text and understand what Short Squeeze is!

An American retailer, which even in the era of online gaming and streaming platforms insisted on focusing its efforts solely on physical sales, ended up becoming the target of funds operating in short selling.

However, thanks to a movement known as a short squeeze, their shares end up inflating and the stock price jumps to 676% per month.

To understand more about this topic and why everyone is talking about it, continue reading.

See our index below:

• What is Short Squeeze?
• How does it work?
• Why has there been so much talk about the Short Squeeze?
• How does a short squeeze harm those who short sell?
• Conclusion.

What is Short Squeeze?

It's a maneuver on the Stock Exchange; this movement occurs when an asset rises rapidly.

With this sudden change, investors who were betting on the fall of these assets end up being forced to buy them quickly to avoid losses. 

How does it work?

The term "Short Squeeze"Translated, it becomes 'Short squeeze,' meaning that in this context, investors end up being pressured by this tight situation that requires a quick response in the short term."

In fact, although the explanation fits the context and makes the situation easier to understand, the term "Short" in the investment world refers to investors who trade a stock betting that it will fall.

Therefore, when you invest in an asset betting that it will depreciate, you are operating in “"Short or Sold".

But why would anyone do that if we invest in stocks thinking about the possibility of them appreciating in value and generating profits?

A short squeeze is like shooting yourself in the foot for an investor, because the stocks involved in this movement are borrowed by a fund from other investors, as if they were rented.

Next, they sell at the current price; the idea behind this action is to buy back these shares at a lower price and return them to the original owner, thus profiting from the decrease in the asset's value.

However, it happens that Short SqueezeThe stocks are overvalued, as if by magic, and the funds have to buy them back, but at a much higher price and before they rise even further.

Why has there been so much talk about Short Squeeze in recent months?

GameStop It's a retailer with a chain of video game stores. It had nothing remarkable about it and saw its sales fall day after day. Because of this, it was a prime and exclusive target for operations in Short.

In other words, many funds were trading betting that it would fall, but there was a minority of investors who bet against it.

Due to practices developed online by this minority of investors, GameStop's stock took a different turn and rose rapidly.

THE Reddit It is one of the largest online forums in the world and has been the stage for the actions of minority investors.

They decided to devise a plan against the analysts who consistently traded in favor of the fall of the... GameStop.

Investors bought up large quantities of this company's shares, and as a result, the share price began to rise.

So, pressured by the growth and to avoid greater losses, the funds had to buy the shares before they grew even more.

The result? An overvaluation of GameStop shares due to market activity resulting from funds buying back the shares and also from the interest generated by the case.

The companies or individuals who had rented/lent their shares to the funds ended up asking for them back, so those who were shorting the shares ended up having to buy back the assets at a higher price, creating a... Short Squeeze.

How does a short squeeze harm those who short sell?

According to the rules of the American stock exchange, those who short sell must have a percentage of the value of the shares deposited; this amount serves as collateral.

Therefore, when the stocks soar, they need to pay out the value of that guarantee.

Furthermore, if there are many sellers wanting to buy back the shares before losing even more money due to the overvaluation, they will have to compete, because everyone is eager to get rid of their shares.

The scenario becomes somewhat chaotic, mainly because there is no set limit to how high the stocks can go.

In the case of GameStop, the mega investors, that is, the big ones hedge funds, suffered great losses with the Short Squeeze.

Conclusion

When the value of securities begins to inflate rapidly, large funds that operate in short selling, that is, large selling funds, want to get out of that situation, since they only profit if the value falls.

In addition to not making a profit, they may incur increasing losses as the stocks in question rise in price.

To avoid greater losses and repurchase shares in time, it is important to monitor charts and calculate interest rates to predict and identify a... Short SqueezeIn addition, it's important to know when to sell the securities.

Just as a company's stock can rise, it can also fall suddenly; one of the main characteristics of these movements is that someone profits and another suffers a loss.

Certainly, you just need to have made the appropriate trades and always pay attention to the charts to try to reverse any undesirable situation or at least minimize losses.

Reference: Nubank

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