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. In this article, we'll review this calculation in more detail, plus we'll discuss what it means to investors when a percentage of a company's float is shorted.
- The "float" refers to the number of tradable shares of a company's stock.
- Theoretically, the maximum amount of a company's float that could be shorted is equal to the float itself; in reality, the short interest can actually exceed the float in rare cases, but it's not typical for a stock to have a short interest greater than 50%.
- When a company's short interest is high (above 40%), it frequently means a large portion of investors anticipate the shares will go down in value and are looking to profit from the decline or are using the short as a hedge against a possible decline.
- Because the reasons for short interest in a company may not be entirely clear, investors would be wise to combine short interest with other technical and fundamental indicators to help make investing decisions.
A Company's Float and Short Interest
Short selling is an advanced trading strategy used by investors to speculate on an expected price decline of a stock or other security. The total number of a company's shares that have been sold short—but have not yet been closed out or covered—is referred to as the short interest. Usually, this number is expressed as a percentage. To calculate the short interest percentage for a stock, divide the number of shorted shares by the number of shares available for trade. The number of tradable shares is also referred to as "the float."
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 theoretically be 20 million shares. How is it that the amount that can 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. In practice, however, there are some rare cases when short interest has exceeded the float.
Example of a Heavily Shorted Stock
While it is uncommon for a stock to have a short interest greater than 50%, it does happen. This was the case for Peloton Interactive, Inc. (PTON) on Feb. 28, 2020, when it had around 26.99 million shares shorted compared to a float of around 42.03 million, which gave the company a short interest of approximately 64%. 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.
One of the dangers of shorting a stock is a short squeeze, which occurs when a heavily shorted stock moves sharply higher, thus "squeezing" short sellers and forcing them to close out their positions, often for a loss.
What Does Short Interest Signify?
This large negative position would suggest that buyers should stay away from the company due to the negative market 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 number of shares that are currently being shorted compared to the number 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.