Ever looked at a rising share price and wondered what is driving it? We all want share prices to move higher so as to enjoy capital gains, but fundamentally it is important to understand the reasons behind the movement.

Looking at the list of recent big movers, two names stand out – Ocado (OCDO) and Moonpig (MOON). Both have spent extended periods out of favour with investors for failing to deliver the kind of growth previously promised. So why has Ocado risen by 17% in a week and Moonpig by 38% in three months? The reasons partly lie with their presence on the top five most shorted stocks list.

According to Shorttracker.co.uk and based on FCA data, nine hedge funds or asset managers are short Ocado, with 6% of the stock on loan. In plain English that means nine institutional investors are betting that Ocado’s share price will fall. If they are right, they will make a profit.

The process involves borrowing shares from someone else and selling them on the open market. If the shares decline in value, the short seller buys more stock at the lower price to give back to the original lender and then pockets the difference.

This can quickly unravel if the share price starts to rise, creating what is known as a short squeeze. This is when short sellers decide to cover their short positions or are forced to do so via margins calls – effectively buying stock as it rises, which in turn can push the price even higher.

In Ocado’s case, a broker upgrade on 12 June caused the price to jump and it looks like a short squeeze might have taken it even higher. At one point in the day, it was up more than 10% as investment bank BNP Paribas Exane switched its rating from ‘underperform’ to ‘neutral’.

Under normal circumstances, that would hardly be a major catalyst for the shares, certainly not as a powerful as moving to a ‘buy’ rating. After all, Exane is still effectively sitting on the fence with its rating. However, investors were pleased with what they read, with Exane saying the company was entering a more ‘settled’ phase after struggling to grow volume and excess capacity post-pandemic.

On 30 March, Moonpig said its full-year results would be in line with expectations and the share price has since moved higher, as investors take the view that life is not getting worse for the business following earlier problems.

Despite the higher share price, the amount of stock on loan has stayed fairly steady around the 5% mark, suggesting that short sellers are happy to keep their positions open. Keep your eye on the full-year results announcement on 29 June as positive news could cause a greater than normal share price reaction if the shorts need to buy more stock.

If sentiment remains poor towards a stock, it is easy to see the share price continue to drift lower until there is news to change the market’s mind. Approximately 5% of Boohoo’s (BOO:AIM) shares are out on loan to short sellers and its price has fallen by 24% in
a month, meaning the shorts are cleaning up.

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