In financial markets, a ‘short’ is when you borrow a stock from a broker and sell it immediately at its current price because you believe that the stock’s price will fall and you can buy it back at a lower price and then return the shares you borrowed, but keep the difference.
For example, say you want to short XYZ company stock which has a current price of $10 per share because you believe that the price will drop. You borrow 1 share from the brokerage and later in the trading day the price of XYZ stock drops to $7 per share. You decide to ‘cover’ (meaning buy it back) your short position and buy the 1 share at $7 dollars and return that 1 borrowed share to the brokerage. You made $10 when you sold the share and only had to pay $7 to buy it back at a lower price giving you a profit (based on the difference) of $3.
But now let’s say that instead of the XYZ price dropping to $7 per share, it goes up to $15. You still need to return the 1 borrowed share to the brokerage, except now it’s going to cost much more to buy it back. If you buy it back at $15, you can return the borrowed share, your loss will be a $5 difference between selling it at $10 and rebuying it at $15. Since the price of the stock can potentially rise indefinitely, the potential loss as a short seller is unlimited. At some point, you will have to buy it back to return the shares to the brokerage you borrowed them from. The more the price of the stock rises, the bigger the loss. If the price continues to rise, at some point the brokerage will trigger a margin call that will require you to choose to either deposit more money in a brokerage account or sell the share of stock along with paying out the difference.
A short squeeze is a rapid increase in the price of a stock owing primarily to technical factors in the market rather than underlying fundamentals. Short squeezes result when short sellers of a stock move to cover their positions, purchasing large volumes of the stock relative to the market volume. Since covering their positions involves buying shares, the short squeeze causes a further rise in the stock’s price. This newly increased price can, in turn, trigger additional margin calls and short covering, which in turn may drive up the price further still in a vicious feedback loop.
An example of this type of short squeeze occurred back in October 2008 (during the Saturn-Uranus opposition), a short squeeze temporarily drove the shares of Volkswagen on the DAX – the German Index, from €210.85 to over €1000 in less than two days, briefly making it the most valuable company in the world.
The GameStop short squeeze began in early January when a Redditor on the Reddit forum WallStreetBets notice that a Wall Street hedge fund took a massive amount of short trades against GameStop, an American video game, consumer electronics, and gaming merchandise retailer. They convinced everyone on the thread to join forces and buy as much GameStop stock as possible. This made the price rise and the hedge fund’s short position started to lose billions.
The GameStop short squeeze started on January 22, 2021, and ongoing as of January 28, 2021 (during the Saturn-Uranus applying square), This squeeze led to the share price going from a price of US $17.25 on January 4, 2021, to an all-time intraday high of US $380.00 on January 27, 2021, on the NYSE, a rise of over 2100%! Eventually, the hedge fund had to close their short positions on GameStop and buy all the GameStop stock shares back at a significantly higher price, sending the price even higher as a result. The hedge fund’s losses due to the short squeeze surpassed the 13.1 billion that the hedge fund was worth. Now the hedge fund is declaring bankruptcy, and the Reddit thread is combing through other hedge funds with massive short exposure so they can also short squeeze them into bankruptcy as well. Wall Street hedge funds are accusing the public of colluding together, stating it should be considered illegal. As a result, Reddit began to DEPLATFORM its Redditors on its WallStreetBets, who BEAT THEM on GameStop.