Short Interest Explained
Short interest indicates how many shares of stock have been sold short out of the total number of shares outstanding. It is often used as an indicator of how bearish investors are on a particular stock but can sometimes be used as a contrarian indicator by bulls.
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Short Selling
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Short selling is a technique that allows traders to profit from a stock's decline. In a short sale, a trader borrows shares of a stock that he does not own from his broker, sells them and keeps the proceeds. After the stock declines, the short seller buys back the same number of shares at a lower price and returns them to the broker. The difference between what he collected from the original sale and what he paid when he bought the shares back is his profit.
Short Interest
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Short interest is usually compared to the float -- the total number of shares available for trading. The higher the short interest, the more bearish traders are on a stock. Shorts are generally very skilled traders so if they are bearish on a particular stock, there is a good probability that they are right and the stock will likely decline.
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Short Interest Dynamics
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Comparing current short interest to that from the previous month shows whether traders are getting more or less bearish on a stock.
Days to Cover
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Dividing the total number of shares shorted by the average daily trading volume shows how many days on average it will take shorts to cover their positions. Days to cover is a contrarian indicator because the longer it will take the shorts to cover if a stock moves against them, the more vulnerable their position.
Contrarian Indicator
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Short interest can be used as a contrarian indicator. If short interest is unusually large and the stock has declined substantially, an upside move may be more likely than a continuing decline.
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