Long-Short Ratio

AAA

DEFINITION of 'Long-Short Ratio'

The amount of a security available for short sale compared to the amount that is actually short-sold. The long-short ratio can be used as an indicator for a specific security, but can also be used to show the value of short sales taking place for a basket of securities or for the market as a whole. The ratio is impacted by the demand for securities borrowing for short sale, and by the supply of securities available for short sale.

INVESTOPEDIA EXPLAINS 'Long-Short Ratio'

The long-short ratio is considered a barometer of investor expectations, with a high long-short ratio indicating negative investor expectations. For example, a long-short ratio that has increased in recent months indicates that more long positions are being held relative to short positions. This could be because investors are uncertain how new short sale regulations will affect the market, or that volatility is making short sales more risky investments.

Hedge funds typically make up a large portion of the short sale market. This is related to their long/short strategies. If hedge funds reduce their short sale positions, as happened during the 2007-2008 financial crisis, the long-short ratio will increase. Regulators consider short selling a factor that led to the financial crisis, and have increased scrutiny on the industry.

The ratio can be affected not only by the demand of investors interested in borrowing securities for short sale, but the supply of securities available for short sale. Pension funds, for example, typically hold securities long-term. If they are unwilling to lend, then high demand from hedge funds will not matter.

RELATED TERMS
  1. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  2. The Great Recession

    The steep decline in economic activity during the late 2000s, ...
  3. Short Selling

    The sale of a security that is not owned by the seller, or that ...
  4. Long/Short Equity

    An investing strategy of taking long positions in stocks that ...
  5. Weak Shorts

    Traders or investors who hold a short position in a stock or ...
  6. Short Squeeze

    A situation in which a heavily shorted stock or commodity moves ...
RELATED FAQS
  1. What is the average price-to-earnings ratio in the Internet sector?

    The average price to earnings varies significantly within the Internet sector but, as of 2015, the current industry average ... Read Full Answer >>
  2. What is the difference between technical analysis and fundamental analysis?

    Fundamental analysis and technical analysis are distinct methods used to research and evaluate securities. Fundamental analysis ... Read Full Answer >>
  3. Why is the price to sales ratio commonly used for comparing companies in the Internet ...

    The price to sales (P/S) ratio is used for comparing companies in the Internet sector because it is the most meaningful measure ... Read Full Answer >>
  4. What does the Dividend Discount Model (DDM) show an investor about a company?

    The dividend discount model, or DDM, is not designed to be used in forecasting any possible capital gains from increases ... Read Full Answer >>
  5. If a company has a high debt to capital ratio, what else should I look at before ...

    A variety of equity valuation metrics can be utilized to evaluate a company along with the debt to capital ratio to get a ... Read Full Answer >>
  6. How can a firm bring down its operating leverage?

    A company with a lower percentage of fixed costs and a higher percentage of variable costs uses less operating leverage. ... Read Full Answer >>
Related Articles
  1. Active Trading Fundamentals

    Short Selling: Making The Ban

    Short selling has been around as long as the stock market, and it hasn't always been looked on favorably.
  2. Mutual Funds & ETFs

    The Multiple Strategies Of Hedge Funds

    Hedge fund investors or potential investors need to understand how much risk hedge funds take in making money.
  3. Mutual Funds & ETFs

    What Are Hedge Funds?

    Hedge funds may be similar to mutual funds in some ways, but they differ in other ways like fee structure. Is a hedge fund for you?
  4. Investing Basics

    The Basics Of Short Selling

    Short sellers enable the markets to function smoothly by providing liquidity, and also serve as a restraining influence on investors’ over-exuberance.
  5. Active Trading Fundamentals

    When To Short A Stock

    Learn how to make money off failing shares.
  6. Active Trading Fundamentals

    The Short Squeeze Method

    The short squeezed strategy can be risky - but also very rewarding - for those who master it.
  7. Options & Futures

    The Secret To Finding Profit In Pairs Trading

    Read about a market-neutral trading strategy using relatively low-risk positions.
  8. Options & Futures

    The Truth About Naked Short Selling

    The media demonizes naked short selling, but in most cases it occurs in a collapse, rather than causing it.
  9. Active Trading Fundamentals

    Short Selling Risk Can Be Similar To Buying Long

    If more people understood short selling, it would invoke less fear, which could lead to a more balanced market.
  10. Mutual Funds & ETFs

    The 2007-08 Financial Crisis In Review

    If you don't know how the recession began, read on to learn more.

You May Also Like

Hot Definitions
  1. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
  2. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  3. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  4. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  5. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  6. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
Trading Center