In general, investors prefer to buy stocks so that they can sell these stocks at a higher price at a later date. This is basically a buy-and-hold strategy.
Now, the concept of short selling is quite different. Here, the profits are made from an anticipated fall in the price of the stock in the future.
An investor who wants to do short selling would first borrow shares of the Company (say, PQR) from a broker. Then, he would sell these shares of PQR at the market price.
This is done with the hope that he would be able to buy back these sold shares at a lower price in the future. This way, the investor hopes to “cover” the position and give back the shares to the broker.
When buying back the shares, the investor makes profits from the difference between the (high) price when the shares were originally sold and the (low) price of the buyback.
So, unlike the typical “buy low-sell high” concept, the investor seeks to “sell high-buy low” in case of short selling.
Assume that a short selling of a stock was done by an investor. Now, if the stock price does not decline as the investor anticipates, a short squeeze happens. Here’s how!
Meanwhile, the investors who have remained long on these shares usually gain a massive profit from such ‘Short Squeeze’.
Following are some of the ways to identify short squeeze.
Once a potential short squeeze stock is found, there are two ways of trading it and making profits from it
Remember to keep the stop-loss orders relatively tight in order to control risk.
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