What happened
Nikola (NKLA 7.23%) stock is seeing massive gains in Thursday's trading. The electric vehicle (EV) company's share price was up roughly 31.5% at 12:30 p.m. ET, according to data from S&P Global Market Intelligence.
Yesterday, the Federal Reserve announced that it would maintain interest rates at their current levels rather than implement a rate hike. It was the latest in a string of favorable developments for Nikola shareholders, and it looks as if the stock may now be seeing explosive positive momentum powered by a short squeeze.
So what
Nikola has been posting large losses and needs to raise new capital in order to continue operating. For much of this year, the company's share price has also been trading below the $1-per-share threshold needed to continue trading on the Nasdaq exchange.
Due to the company's liquidity problems and the threat of being delisted from the Nasdaq, some investors have bet that the company's share price will continue to decline by taking out sizable short positions. But with a recent stretch of good news for the EV company, its stock has been gaining ground -- and those with short positions are being forced to close them out.
The Fed's decision not to raise interest rates lowers the risk that Nikola will be forced to borrow at less favorable rates if it must borrow to raise funds. Additionally, it seems the company will be able to receive authorization for new stock sales even though it postponed the planned voting date for the proposal from June 6 to July 6. These positive developments appear to have triggered a short squeeze that's working to power even more bullish momentum.
Now what
In order to bet against a stock, investors have to borrow shares at a specific price. If the stock goes down, short-sellers will be able to buy back the shares at a lower price and score the difference as profit. But when a stock starts to go up rapidly, investors who have sold short are often forced to buy back the stock. This results in the company's share price being pushed even higher -- and more short-sellers have to close out their positions.
While this kind of short-squeeze dynamic appears to be driving massive gains for Nikola stock, investors should keep in mind that short squeezes tend not to last. The EV company may be able to raise more capital thanks to the short squeeze, but the business is still racking up huge losses and posting very little revenue. Shares could continue to rise in the short term, but the business's long-term viability remains dubious.
