A:

The quick answer is that the amount of shares shorted can actually exceed 50% of the float in a company. The percentage of shares shorted compared to the float is referred to as the short interest. It is calculated by taking the total amount of shares shorted and dividing it by the total amount of shares available for trade.

For example, if 5 million shares are shorted and there are 20 million tradable (or floated) shares, the short interest is 25%. In this example, the maximum amount of shares that could be shorted would be 20 million shares. How is it that the maximum amount that could be shorted is equal to the float? The float is simply the amount of a company's shares that are publicly owned and available for trading, and tradable shares can be borrowed by short sellers.

While it is rare for a stock to have a short interest greater than 50%, it does happen. This was the case for TASER International in late 2004, when it had around 33 million shares shorted compared to a float of around 59 million, which gave the company a short interest of approximately 56%. When a company's short interest is high (above 40%) it means a large portion of the investors in the company are hoping the shares will go down in value.

What Does Short Interest Signify?

This large negative position would suggest that buyers should stay away from the company due to the negative sentiment. But this is not always the case—it can be difficult to tell exactly why investors are shorting a company in such high numbers. Most commonly, investors will be shorting with the intent of gaining on a drop in the share's price. Some investors may be shorting against the box to hedge an already held position from losing any value.

Brokerage firms in need of shares to sell to their clients will borrow stock from another firm, effectively going short and selling the borrowed shares to their clients. So while it may seem like a very negative sign for a company when its stock has a large short interest, it is generally very difficult to predict the stock's future price movement because the reasoning behind shorts is never completely clear.

Short interest is a measure of the amount of shares that are currently being shorted compared to the amount of tradable shares in the market (the float). It should not be relied on as a great signal to buy the shares or a signal to join the shorts; however, underlying fundamentals or technical indicators can be used in conjunction with short interest to formulate better shorts or buys. (See also: Short Selling Tutorial and Short Interest: What It Tells Us.)

RELATED FAQS
  1. How long should you hold on to a short?

    Explore the reasons for short selling and the various factors that influence how long an investor may wish to maintain a ... Read Answer >>
  2. How does one make money short selling?

    Short sellers make money by betting a stock they sell will drop in price. If it drops, the short seller buys it back at a ... Read Answer >>
  3. Is there a time limit that must pass before short sales are accepted for IPOs?

    The quick answer to this question is that an IPO can be shorted upon initial trading, but it is not an easy thing to do at ... Read Answer >>
  4. Can you short sell stocks that are trading below $5? My broker says that I can't.

    Although it is not a requirement set by FINRA or the SEC, brokers will often tell investors that only stocks above $5 can ... Read Answer >>
Related Articles
  1. Financial Advisor

    The 5 Most Shorted NYSE Stocks (VALE, CHK)

    Understand what a short sale is and why people would want to initiate a short strategy. Learn about the top five most shorted stocks on the NYSE.
  2. Trading

    Short interest: What it tells us

    Whether you agree with the overall sentiment or not, short interest is a data point worth adding to you overall analysis of a stock.
  3. Trading

    The Short Squeeze Method

    Trading a short squeeze can be risky, but also very rewarding for those who master it.
  4. Investing

    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.
  5. Investing

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  6. Trading

    Guide to Short Selling

    Want to profit on declining stocks? This trading strategy does just that.
  7. Difference Between Short Selling And Put Options

    Short selling and put options are used to speculate on a potential decline in a security or index or hedge downside risk in a portfolio or stock.
  8. Investing

    Bank of America Short Interest Declines Again

    With Bank of America shares trading at eight-year highs, short sellers continue to run away.
  9. Investing

    Rules and Strategies For Profitable Short Selling

    Short sales work well in bull and bear markets but strict entry and risk management rules are required to overcome the threat of short squeezes.
  10. Investing

    Short Sellers Profit Big Off Intel, Nordstrom, Priceline

    Short sellers generated strong returns by shorting stocks May 8 – 12.
RELATED TERMS
  1. Short Covering

    Short covering is buying back borrowed securities in order to ...
  2. Weak Shorts

    Weak shorts refer to traders or investors who hold a short position ...
  3. Floating Stock

    A floating stock is the number of shares available for trading ...
  4. Short Squeeze

    A short squeeze is when a heavily shorted security moves sharply ...
  5. Short (or Short Position)

    Short or shorting is selling first and buying later, with the ...
  6. Average Daily Float

    Average daily float can refer to the number of company shares ...
Trading Center