To understand “squeezing the shorts,” also called a short squeeze, an investor must first understand short selling.

Short selling is the selling of a security that the seller does not own. The seller borrows the stock, usually from a brokerage. A short seller assumes a security is over-valued and makes money if the stock goes down in price. The seller also assumes that he will be able to buy the stock back at a lower price than for which he borrowed it, thus making a profit on the sale.

Squeezing the shorts occurs when a stock price approaches the price at which the short seller borrowed the original stock. Short sellers scramble to cut their losses by “covering” their positions (returning the shares they borrowed). The greater the number of shorted shares, the faster and higher the stock price will rise. As buying volume and share price increases, the short sellers must continue to buy shares at any price until all shorted shares are “covered.” The biggest risk for short sellers occurs because there is no limit on the amount of money that they can lose if a stock price continues to rise, in contrast to a typical stock purchase where only the amount invested can be lost.

A short squeeze is intensified if the shorted security generally trades with low volume and there is a large amount of shorted positions. This information is usually given as “days to cover”— meaning the amount of days it would take short sellers to cover their positions based on the company's average daily volume. The more days that are needed to cover the short position, the higher the stock price will rise.

Investors can find a stock's short position on the Web sites www.shortsqueeze.com and NASDAQ by entering stock symbols.