What Does Short Interest Mean?
Short interest refers to the number of shares of a company's stock that were sold short by investors who have not subsequently purchased shares to cover the sale.
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How Short Selling Works
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To sell short, an investor borrows stock from a broker or institutional investor and sells it at the current market price. When the stock price falls, the investor will purchase the number of shares originally borrowed and return them to the lender. The difference between the sales price and subsequent purchase price is the investor's profit.
Reporting Requirements
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Investment firms report their short positions to the stock exchange on the 15th of each month. The stock exchange publishes these data 8 days later.
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Short Interest Ratio
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Investors use the published data to calculate the short interest ratio, which measures the number of days it would take all short sellers to buy the shares necessary to repay the lenders. The ratio is calculated by dividing short interest by average daily trading volume.
Interpreting Short Interest
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Investors view rising short interest and high short interest ratios as signs that the stock price will fall.
Contrarian Viewpoint
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Contrarians view a high short interest ratio as a buy signal, because short sellers seeking to repay lenders will drive demand for shares, resulting in higher share prices.
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