What happened

Shares of car insurance company Root (NASDAQ:ROOT) traded roughly 10% higher as of 2:55 p.m. EDT for no obvious reason other than recent chatter that the company could be a candidate for a short squeeze.

So what

Root focuses on insuring good drivers who are typically a lot safer than the average driver. In mid-August, several analysts downgraded the company, citing growth challenges.

But about a week ago, lots of talk on the popular subreddit WallStreetBets, which pumped stocks like GameStop and AMC Entertainment Holdings, began to point to Root as a potential target. A short squeeze occurs when a lot of investors bet that a stock’s price will drop, but instead the price rises. If the losses, which can be limitless in a short position, begin to pile up and investors suddenly want to buy the shares and close their position, they end up driving up the stock price because they are all buying shares at once.

Many retail investors on Reddit and social media view Root as a target because more than 30% of Root’s float, shares eligible to be traded by the public, are being shorted, so the rise today could be attributed to a squeeze, or retail investors betting on a squeeze.

Squiggly blue line on graph moving upward.

Image source: Getty Images.

Now what

After the meteoric rise of GameStop and AMC, it’s hard to argue that the retail investors on WallStreetBets don’t have the power to pump stocks higher.

But again, this doesn’t mean Root is a good company, and once a stock does experience a short squeeze, it can be very, very volatile, so invest in these situations with extreme caution.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.





Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here