Business, Legal & Accounting Glossary
Short interest ratio is a metric that reveals positive or negative sentiment about a stock. To calculate the short-interest ratio, divide the total number of shares in a company investors have sold short by the stock’s average daily trading volume. For example, if a company with 100 shares trading on the open market has 10 shares sold short, and 5 of the company’s shares are traded each day, then the short-interest ratio is 2. Short interest ratio is also referred to as “days to cover” because it reveals how many days of trading short-sellers would need to buy back shares and cover their short position. Knowledgeable investors consider a high short interest ratio to be a bullish signal and a low short interest ratio to be a bearish signal. A high short-interest ratio is considered bullish because in theory, it indicates that market sentiment about a stock has become excessively negative, presaging a possible rally. However, some investors consider using the short-interest ratio to make trading decisions problematic because short interest is published only once per month, rendering the data stale after a few days.
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This glossary post was last updated: 5th February, 2020