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What is a short squeeze and will there be another big one soon?

Written by Eric Ebbert CFP®, MBA

On March 6, 2021

The recent GameStop short squeeze situation has whipped up a frenzy of would-be investors looking to cash in on what appeared to have been a good move. As of March 8, 2021, GameStop (GME) closed at 193.720, meaning lots of investors who have been holding since much lower entry positions from merely weeks ago are about to cash in big-time.

Many seasoned investors know that events like this are few and far between. However, new and inexperienced investors who tasted luck with GME are eagerly sniffing out the next big short squeeze. The question is, will there be one?

What is a short squeeze?

Simply put, a short squeeze occurs when a stock’s value increases significantly, forcing traders who have shorted it to cover their positions and buy the expensive shares to avoid even greater losses.

Short-sellers are investors who borrow shares of a stock they believe will drop in price with the goal of buying them after the price falls. This results in them returning the shares and holding on to the gains earned the price they borrowed versus the price they sold at. However, shorting comes with the risk of having to buy at a higher price if the price increases rather than falling. When the price increases, they either have to continue holding the borrowed shares while paying interest on them or they will have to buy out the shares for whatever the price is before it jumps even higher.

Will there be another big short squeeze?

Squeezes happen all the time in the market, but usually not to the degree that we are seeing with GME. Investors can analyze trends and identify stocks that look to be appearing well that have a lot of short interest, and by buying these stocks, they can increase the price and make a high sale when the short-sellers are eventually forced to cover.

You have to do a lot of research and be willing to risk a lot when you short or bet against short-sellers. These types of high-risk moves are best left to experienced and professional investors.

Talk to a ProVise CFP® professional about investing risks

Do you want to grow your wealth through investing but are not comfortable making decisions that may put your portfolio at risk? Financial professionals, like our team at ProVise Management Group, can help you make investment decisions that work for you within your comfort level.

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about investing? Contact ProVise today to schedule a complimentary consultation.

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