When can a "short squeeze" happen to a company?

Avis has been on quite the rollercoaster. The car rental company’s stock increased sevenfold just in the last month.

But on Thursday, it fell by about 50%, losing roughly half those gains. That’s the worst day Avis has had on Wall Street in 28 years. The company’s meteoric rise and dramatic crash are thanks to what investors call a “short squeeze.”

Short squeezes start because investors bet on a stock doing poorly, also known as taking a short position.

Paul Shea, an economics professor at Bates College, said, for example, he could borrow a bunch of shares of Avis stock, sell them while they’re overpriced, and then buy them back up and return them to his lender when the price falls.

“For whatever reason, I decide that I think Avis is overpriced… and I’m looking for a way to make money off of this,” Shea said. “So I’ve profited because the price of the stock has gone down. This is a really popular way that you can bet against a firm, a sector, anything you think is overpriced in a financial market.”

Tyler Schipper, associate professor of economics and data analytics at the University of St. Thomas, said Avis was ripe for the picking because rental car companies have had a tough go recently.

“It's still a relatively competitive industry with lots of other potential modes of transportation, where people can now get Uber or Lyft pretty easily and get around lots of places,” he said.

But when too many investors take that short position, it drives up the demand for the stock. So the stock price climbs… and climbs… and climbs — making those investors’ bets fail spectacularly.

The people who lent their stock to the investors see the stock being worth a lot more, and want them to give it back. But the investor had sold it, remember?

“They have to actually go into the market and buy that stock in order to return it to whoever they borrowed it from,” said Brett House, an economics professor at Columbia Business School.

House said the short squeeze is when a whole bunch of the loaners force that to happen at the same time. All the people who wanted to buy the stock back when it was cheap have no choice but to buy it when it’s rising.

“And that pushes the price up further, and that creates a spiral that is the squeeze,” he said.

Once the investors pay back all their borrowed shares, the price falls, and the squeeze ends. Angel Tengulov, assistant professor of finance at the University of Kansas, said that happened recently with AMC and GameStop.

“Their stock prices remained at elevated levels for an extended period of time after the squeeze events,” he said.

So even though it’s been a tumultuous month for Avis, it could mean more money for the company in the long run.