A situation where the price of a stock rises rapidly, forcing short sellers to buy back their borrowed shares to limit losses. This buying pressure from short sellers pushes the price up even further. Short squeezes can cause dramatic price spikes in stocks with high short interest.
A stock has 200,000 shares shorted while only 1 million shares are outstanding. Positive news causes the price to jump from $10 to $15. Short sellers panic and rush to buy back shares to stop losses, pushing the price to $20, which triggers more short covering and further price increases.
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