Shares of many highly shorted stocks rose sharply on Wednesday, as traders bid up their prices in hopes of igniting short squeezes.
Here are some of the day's top gainers:
- Genius Brands (NASDAQ:GNUS), up 81%
- Eastman Kodak (NYSE:KODK), up 28%
- Palantir Technologies (NYSE:PLTR), up 10%
- Virgin Galactic (NYSE:SPCE), up 10%
A short squeeze can occur when short-sellers suffer sizable losses on a fast-rising stock. To short a stock, a short-seller borrows its shares from another investor and sells them, with the goal of buying them back at a lower price and harvesting a profit.
When traders squeeze short-sellers, they essentially bid up a stock's price to force them to close their short positions, which requires that they buy back the shares they sold short. This forced selling on the part of short-sellers can turbocharge a rally in a heavily shorted stock's price.
In recent days, traders have used social media sites like Reddit and Twitter to spur other investors to buy shares of many stocks with high levels of short interest. They've found success in driving up the prices of stocks like AMC Entertainment and GameStop. Now, they appear to be attempting to do the same with Virgin Galactic, Palantir, Genius Brands, and Kodak, among other highly shorted stocks.
Investors should note that short squeezes are not inevitable. The recent rallies in many heavily shorted stocks could fizzle out, and their prices could quickly reverse course. That could lead to large losses for traders who buy at today's inflated prices.