
WallStreetBets (WSB) burst onto the investing scene in early 2021 as retail investors banded together to take on institutional players. The popular trading subreddit led a short squeeze against hedge funds with large short positions in GameStop (NYSE: GME). GameStop shares soared due to the collective buying by WSB participants and the short covering that followed. Shares rose north of 1600% in Jan. 2021.
Short covering is when investors close out their short positions by buying shares as the stock price starts to rise instead of fall. This can help limit their losses, but it also causes shares to rise even higher as more buying takes place. In a short squeeze scenario, buying from one group and short covering from another can create a vicious cycle, causing the value of a stock to increase exponentially.