What is a 'Short Interest'
A short interest is the quantity of stock shares that investors have sold short but not yet covered or closed out. Short interest is a market-sentiment indicator that tells whether investors think a stock's price is likely to fall. It can also be compared over time to examine changes in investor sentiment.
BREAKING DOWN 'Short Interest'Investors use short interest to make predictions about the direction a particular stock is headed, and to measure the bullishness or bearishness of investors' sentiment toward the market as a whole. Short interest can be expressed as a percentage by dividing the number of shares sold short by the total number of outstanding shares. For example, 3% short interest means 3% of the outstanding shares are held short. Short interest can be expressed as the number of shares sold short but not yet covered or closed out. Short interest data is widely and easily available online.
Short interest for individual stocks is updated monthly. The short interest is a combination of shares sold short by individuals, professionals and institutions including market makers and specialists. When the short interest for a stock rises above 25%, it may be a warning sign that sentiment is growing negative on the company. Stocks with short interest above 40% are highly susceptible to potential short squeezes. Stocks with smaller floats and high short interest have the highest danger of short squeezing as shortable shares become scarcer more quickly.
Short Interest and Short Squeezes
A short squeeze forms when short sellers are forced to cover some or all of their positions by buying back the shares. Usually a short squeeze ignites on a large price, and volume spikes sparked by news or rumors. The unavailability of additional short shares traps the existing short sellers, causing forced liquidations from margin calls, which sets off another wave of buying to cover short positions. Oftentimes, individual brokers may also raise the maintenance margin requirements on these stocks, which forces more short sellers to downsize their positions. This pushes the stock price even higher as more desperate short sellers panic trying to cover.
This cycle repeats itself until the stock finally peaks out and exhausts. Predicting where a short squeeze will finally conclude is a futile endeavor. Fundamental news items such as strong earnings reports and raised guidance, FDA approvals, successful clinical trials, outside investments, partnerships/joint ventures with larger peer companies, successful court rulings, patent news and analyst upgrades can fuel a short squeeze. Takeover rumors and speculation are also notorious for sparking a short squeeze.