Short Interest Information
When shorting a stock, the investor will make money if the price of the stock's shares will fall. One of the measures investors use when evaluating a stock is the short interest. This measurement is useful to determine the investor sentiment toward the stock, and it can be a barometer of the future direction and volatility of the stock. Short interest is an important data point to consider when researching a stock, but it cannot be the sole determining factor in deciding to buy or short the stock.
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Definition
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Short interest is the number of shares of stock that are held short divided by the total number of shares that are available to the public. For example, if a stock has 50 million shares available and 2 million shares are held short, the short interest for the stock is 4 percent.
Release of Short Interest Data
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The number of shares held short is not a metric that is revealed in real time. Stock exchanges typically issue reports on a monthly basis detailing the number of shares held short. As a result, short interest information available to investors can be somewhat out of date. It is important for investors to realize that they are not looking at real-time data when analyzing short interest information; rather, the short interest data is simply a snapshot of a given time.
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Where to Find Short Interest Data
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Short interest information can be obtained from your broker or financial adviser. It can also be found on major financial websites. Yahoo! Finance and Google Finance are two of the most popular financial websites that provide short interest information. Some websites do not provide a short interest data point. Instead, they provide the number of shares held short. If this is the case, simply divide the number of shares held short by the number of shares outstanding.
What Does Short Interest Tell Us?
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Short interest can give clues on investor sentiment about a stock. If a stock has a high short interest, it is safe to say that many investors believe that the stock is overpriced and that the share prices will decline. Conversely, if the short interest is very low, the majority of investors believe the stock will rise in the future.
Short Interest and Short Squeezes
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A short squeeze happens when there is a lot of short interest in a stock and many of the short sellers try to close out their short positions at the same time. When a short seller wants to close out the short position, he needs to buy the shares of stock. This mass rush to buy the stock by the short sellers leads to an increase in demand for the stock. The increase in demand for the stock then leads to an increase in the stock price. Short squeezes typically occur on stocks that have high short interests.
Warning
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Short interest is only one data point when analyzing a stock. It cannot be used as the sole determining factor when deciding whether to short a stock. A large short interest can be a gauge of the investor sentiment, but other factors need to be taken into consideration, such as the overall market conditions and the financial prospects of the company in question. Use short interest data as one tool in your stock analysis, but do not rely on it as the sole determining factor in whether you buy or short a stock.
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