What is Short Interest

Short interest is the number of shares that have been sold short but have not yet covered or closed out. Short interest, which can be expressed as a number or percentage, is an indicator of market sentiment that tells whether investors expect a stock's price is likely to fall. 

BREAKING DOWN Short Interest

Short interest can provide insight into the potential direction of an individual stock or how bullish or bearish investors are about the market overall. Stock exchanges measure and report on short interest, too. Typically, they issue reports at the end of each month, giving investors a tool to use as a short-selling benchmark.

A large increase or decrease in a stock's short interest from the previous month could be particularly indicative of sentiment. For example, when the short interest for a stock rises above 25 percent, it may be a warning sign that sentiment is growing negative on a company; it shows a 25 percent increase in the number of investors who expect the stock price will decrease. Such a large shift may give investors a reason to go deeper with their analysis.

Stocks with short interest above 40 percent are usually candidates for short squeezes. Stocks with smaller floats and high short interest have the highest probability of short squeezing as shortable shares reduce in number.

Short Interest Expressed as a Ratio

The short-interest ratio can be found by taking the number of shares sold short, known as short interest, and dividing by average daily volume. This is often called the days-to-cover ratio because it determines, based on the stock's average trading volume, how many days it will take short sellers to cover their positions if positive news about the company lifts the price.

For example, if a stock that has a short interest of 40 million shares and average daily volume of shares traded is 20 million, 40,000,000 divided by 20,000,000 shows that it would take two days for all the short sellers to cover their positions. Quite simply, the higher the ratio, the longer it will take to buy back the shares borrowed. 

As a short interest alternative, the New York Stock Exchange’s short-interest ratio is a particularly prominent measure of market sentiment. Its ratio is the same as short interest except that it calculates it as monthly short interest on the entire exchange and divides by the average daily volume of the NYSE for the last month. 

Short interest can be telling and a useful tool, but it is not meant to be the sole determinant of an investment decision. It is a data point to add as part of an investor’s overall analysis.