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 equal to 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 Inc (TASR) 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. 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.

For further reading, see our Short Selling Tutorial and Short Interest: What It Tells Us.

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