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 is a great gauge of market sentiment, but traders may also want to consider the put-to-call ratio, which factors in the differences between open put options (bearish) and call options (bullish). If you're new to options trading, check out Investopedia's Options for Beginners Course for a comprehensive introduction, with over five hours of on-demand video, exercises, and interactive content. You'll learn everything you need to know to get started confidently trading stock options. ]

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.

  1. Short Squeeze

    A short squeeze is a situation in which a heavily shorted stock ...
  2. Short Selling

    Short selling is the sale of a security that is not owned by ...
  3. Crowded Short

    A crowded short is a trade on the short side with a large number ...
  4. Squeeze

    1. In financial terms, a period of time when borrowing is difficult. ...
  5. Short-Interest Theory

    A theory which holds that a security with a high degree of short ...
  6. Net Long

    Net long refers to a condition in which an investor has more ...
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. 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.
  3. 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.
  4. Trading

    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.
  5. Trading

    How To Protect A Short Position With Options (FB, AAPL)

    Short selling can be a risky endeavor, but the inherent risk of a short position can be mitigated significantly through the use of options.
  6. Investing

    How To Short Amazon Stock

    With the stock reaching all-time highs and the company gambling on several new business lines, many investors may feel it's a good time to short sell Amazon.
  1. How is the short interest of a company related to a short squeeze of a company?

    Learn about the short interest and short squeeze, how to determine if a stock is a short squeeze candidate and how short ... Read Answer >>
  2. What is the difference between a short position and a short sale?

    Learn how short selling and short positioning are different, specifically in regards to the nature of the commodity being ... Read Answer >>
  3. Here's What Short Sellers Must Do to Short a Stock

    Learn what benefits a short seller is required to make up to the lender of shares, or long investor, when shorting a stock ... Read Answer >>
  4. How long can a trader keep a short position?

    Learn whether there are any limitations on how long may an investor hold a short position, and explore the costs associated ... Read Answer >>
  5. 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 >>
Hot Definitions
  1. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  2. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
Trading Center