There are dozens of ways to pick stocks, but few have been as unconventional — or as successful — as the coordinated short-squeeze being deployed by Reddit’s army of day traders. Now, Wall Street is scanning the matter.
- A short squeeze is a term used by market participants to refer to a phenomenon where short-sellers in a stock who have placed their bets on a stock’s fall, rush to hedge their positions or buy the stock in the event of an adverse price movement, in order to cover their losses.
- This leads to a sharp rise in demand for the share and a huge rally in share prices.
- In order to cover his loss, the trader who was initially short on the stock starts buying the stock, which leads to a sharp rise in the share price of the stock.
- This phenomenon, where the short seller is buying the stock to cover her loss, is referred to as a short squeeze in market parlance.
- It leads to a dramatic rise in share price, far beyond its fundamentals.