Business, Legal & Accounting Glossary
The total number of shares of a security that have been sold short and not yet repurchased. Some investors consider rising short interest a near term bullish indicator, since those shares represent imminent buy orders.
Short interest or short-interest ratio is the total amount of shares that have been sold short on a particular stock.
Short interest isn’t being curious about an item of clothing or even about going short on a stock. Instead, it is a measure of the number of shares sold short. That is, the number of shares sold short is divided by the average daily volume to yield a number, expressed in days. This is the number of days it would take to completely “cover” all the shorts, or buy back all the shares sold short, if that was the only buying going on.
It also is called “days to cover.”
Short interest is large when there is a large number of shares sold short or when trading in the stock is illiquid (a low number of shares are traded on average per day).
If you are a long investor (buy shares to sell them later at a, hopefully, higher price), a high short interest should cause further due diligence research to try to find out why and whether it is due to a large percentage of shares sold short or low average trading volume. If the former, dig in deeper — short-sellers tend to be savvier than the average investor. If the latter, be aware that the low liquidity might limit how quickly you could sell your shares.
Those who use technical analysis 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.
All else being equal, short-sellers prefer that the short-interest ratio is low so that it would not (theoretically) take long for them to cover in case there is a short squeeze.
Long
Short
Short squeeze
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This glossary post was last updated: 28th November, 2021 | 0 Views.