What happened

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:

So what 

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. 

Statues of a bull and a bear face each other.

The bulls are trying to force the bears out of their short positions in many battleground stocks. Image source: Getty Images.

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. 

Now what

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.