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Short Interest

What Is Short Interest?

Short interest is the number of shares of a stock that have been sold short by investors but have not yet been paid back.

Investors who believe a stock is overpriced and headed for a fall can short a stock by borrowing shares from their broker and then selling them, the proceeds of which go into their account. At some point they have to buy the shares back and return them to the broker. Short sellers make a profit if the price they pay to buy back the shares is less than what they sold them for. They lose money if the price goes up.

Short Interest Ratio

A similar metric is the short interest ratio, which is the number of shares sold short divided by the stock's average daily trading volume; in other words, the number of trading days it would take for short sellers to buy the stock back. High numbers for both are bearish signals.

Some contrarian investors, however, look at high short interest or short interest ratio as a buy signal, thinking that the market's sentiment may be overly negative and that the stock is therefore underpriced and due for a rebound. If they're right, the shorts may find themselves in a short squeeze, scrambling for stock to buy back before the price goes even higher. That action may cause the price to rise even more, benefiting the contrarians.

Example Of Short Interest

Short interest can vary widely from stock to stock, indicating investor sentiment.

For example, Tesla (TSLA), the electric car manufacturer, is often heavily shorted due to its volatile trading history, which creates opportunities for both short sellers and bullish investors. At the end of July 2019, for example, the stock had short interest of more than 39 million shares compared to average daily volume of more than nine million shares, indicating a short interest ratio of 4.2 days.[1]

By comparison, Amazon (AMZN), whose stock trajectory has been mostly straight up for years, had short interest of only 3.6 million shares compared to daily trading volume of 3.4 million, indicating a short interest ratio of just over one day. Facebook and Google also have short interest ratios of about one day.[2]

Summary

Short interest is the number of shares of a stock that have been sold short by investors but have not yet been paid back. The short interest ratio is the number of shares sold short divided by the stock's average daily trading volume, or the number of trading days it would take for short sellers to buy the stock back. High numbers for both are considered to be bearish signals.

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