Reviewed by Sep 28, 2020| Updated on
What is a Squeeze?
The term squeeze, in the context of business, is often used to describe financial and business situations, which involve some kind of market pressure. For industry, it is a time when borrowing is difficult or a time when profits decline due to cost rises or sales drop.
The word squeeze is used in the financial world to describe situations where short-sellers buy stock to cover losses or where investors sell long positions to take capital gains off the table.
How Does Squeeze Work?
The concept is used liberally in finance and business and describes any situation in which people find it difficult to recognise losses, take gains, or find credit financing. The types of squeezes are — including benefit squeeze, credit squeeze, a short squeeze, and long squeeze.
Types of Squeezes
A company understands a profit squeeze when its profit margins have reduced or are through. This form of squeeze occurs when a company's revenue is declining, or its costs are increasing. A profit squeeze's underlying causes are many but typically consist of increased competition, evolving government regulations, and increasing producer and supplier control.
A credit squeeze describes any situation where borrowing money from banking institutions becomes difficult. Normally, this form of squeeze happens when an economy is in a recession or when interest rates are rising.
Bad debt issuance, such as in the case of the financial crisis of 2008, also triggers a recession and credit squeeze. A rise in interest rates occurs as the Federal Reserve considers the economy to be stable enough, and consumer trust to believe a higher interest rate is high enough. Therefore, a credit squeeze will occur in a down and upmarket.
A short squeeze is a common equity market situation where the price of a stock decreases and the amount of its acquisition rises as short-sellers exit their positions and reduce their losses. In the short term, when an investor wants to shorten a stock, he bets the price decreases. If the opposite happens, then the only way to close the gap is to go long by buying stock shares. This causes the stock price to rise higher, leading to further pressure from short-sellers.
In a strong financial market, a long squeeze happens when there is a sudden fall in prices and investors who are holding a stock for a long time sell a portion of their stake, forcing longer stockholders into selling their shares to hedge against a drastic loss. This, typically, occurs when investors place a stop-loss order to reduce risk and ensure that they are safe from any decreases in prices.
They also do so with uncertainty, even when prices are increasing, and quick downward swings can cause the sell order.
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