What happened
Shares of AMC Entertainment (AMC 8.23%) soared on Wednesday, as the struggling movie theater chain's stock became the focus of an army of individual investors intent on hammering short-sellers.
As of 11:27 a.m., AMC's stock price was up an incredible 230%.
So what
Many traders have recently been synchronizing their purchases on sites like Twitter and Reddit in an attempt to drive up the price of heavily shorted stocks.
A so-called short squeeze occurs when short-sellers -- people who have placed bets that would profit from a decline in a stock's price -- are forced to close their positions to stem their losses. To do so, short-sellers must buy back the shares they sold short. When done en masse, this type of forced selling on the part of short-sellers can lead to a quick and violent rise in a stock's price.
AMC Entertainment's stock price skyrocketed on Wednesday as the bulls triumphed over the bears. Image source: Getty Images.
After routing short-sellers who bet against GameStop following an epic short-squeeze that drove the video game retailer's stock up more than 1,700% in recent weeks, these bear-crushers appear to have now set their sights on AMC Entertainment.
Now what
Although short squeezes can generate powerful rallies, they can also quickly reverse. When they eventually do, traders who bought later into the rally can suffer gruesome losses.
Quite simply, this is a dangerous game for investors to play. And there are far easier and safer ways to build wealth in the stock market.
