Business, Legal & Accounting Glossary
The short-interest ratio is the number of shares short divided by average daily volume.
Technicians use the short-interest ratio as a tool to determine future volatility. A high ratio is considered volatile because it indicates both an extreme bearish sentiment on the stock, as well as the potential for strong future buying pressures as short sellers would cover their short positions in the event of an upside surprise. This occurrence is known as a “short squeeze.” A low ratio is neutral.
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.
The 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.
Short
Bear
Technical analysis
Short squeeze
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Short Interest Ratio are sourced/syndicated and enhanced from:
This glossary post was last updated: 28th November, 2021 | 0 Views.