What Is a Short Squeeze?

By Lou Whiteman – Updated Jun 3, 2025 at 1:16 PM

Key Points

Short squeezes occur when short sellers rush to buy stocks, pushing prices up.
High short interest may indicate potential for a short squeeze, but caution is advised.
Short squeezes are rapid and speculative, not suitable for long-term investment strategies.

Most stock market participants invest using buy-and-hold strategies, aiming to identify strong companies with bright, long-term futures.

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A flowchart illustrating the events that can lead to the short squeeze of a stock. — Image source: The Motley Fool

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Sofia Johan, an associate professor in the finance department of FAU’s College of Business — Sofia Johan, associate professor in the finance department of FAU's College of Business. Her areas of expertise and research interest include legal and ethical issues in financial markets, entrepreneurial finance, and regulation of financial markets around the world.

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The Motley Fool: As we saw with GameStop in January 2021, when forces align, a stock's price can rocket higher, causing a "short squeeze." That said, do you anticipate any trends in the future as more of these phenomena are fueled by the internet and social media?

Johan: I expect that there will be greater oversight on naked shorts. This is especially relevant as many retail investors do not fully understand the trading process. In a typical short sale, a seller will either directly or go through an intermediary to borrow the shares to deliver to the buyer. When prices go down (hopefully) the seller will buy shares at a lower price to deliver to lender or to close out. The short squeeze resulting from prices going up is one issue, but there also are other risks, such as difficulty in borrowing the shares. Some intermediaries have access to client accounts, such as Mutual Funds, or other Institutions that tend to keep their stock holdings stable. But as demand to borrow increases, then the lending cost may increase, or some intermediaries get preferential treatment. This potentially increases levels of naked shorts, where the seller does not intend to deliver the shares.

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About the Author

Lou Whiteman is a contributing Motley Fool industrials and financial services analyst covering aerospace, defense, transport, manufacturing, specialty finance, and bank stocks. Previously, Lou was a financial analyst and senior writer for TheStreet, a venture capital specialist for The Deal LLC, and a high school personal finance teacher. He holds a bachelor’s degree in communications from Loyola University Maryland and completed a fellowship at the ABA Stonier Graduate School of Banking.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends Volkswagen Ag. The Motley Fool has a disclosure policy.