What is the 'Short Interest Ratio'

The short interest ratio is a sentiment indicator that is derived by dividing the short interest by the average daily volume for a stock. Also known as the days to cover ratio, it is used by both fundamental and technical traders to identify the prevailing sentiment the market has for a specific stock.

Short Interest Ratio

BREAKING DOWN 'Short Interest Ratio'

Shorting a stock is the opposite of buying a stock. Specifically, it is the selling of a stock that is not owned by the investor. The goal of selling a stock short is to make money when it falls to a lower price. The investor is betting that the price of the stock will go down. Once the price goes down, the investor can buy the stock at the lower price without having to own the stock. The expectation is for the price of the stock to go down. Looked at in aggregate, short interest and the short interest ratio can provide clues about the level of bearish sentiment in the market.

Short Interest Percentage vs. Short Interest Ratio Calculation

Short interest is the number of shares shorted in the market. The level of short interest is calculated by dividing the number of shorted shares by the number of shares outstanding. For example, a stock that has 1 million outstanding shares sold short, and 5 million shares outstanding in total, has a level of short interest that can be described as 20%, or 1 million divided by 5 million. The more people that short the stock, the higher the level of short interest.

The short interest ratio is the ratio of the number of shares shorted to average daily volume. If a company has 1 million shares shorted and an average daily volume of 200,000, it will take five days to cover all shares sold short in the market, calculated as 1 million divided by 200,000.

Short Interest and Short Interest Ratio Interpretation

When short interest grows, it means more investors are covering their positions because they are worried about and/or expect the price of company stock to go down. If a company's short interest increases by 20% in one month, it means there was a 20% increase in the number of investors that are betting on the stock price going down.

The short interest ratio provides a number that is used by investors to determine how long it will take short sellers, as a number of days, to cover their entire position if the price of a stock begins to rise. The short interest ratio can also be applied to exchanges to determine the sentiment of the market as a whole. If an exchange has a high short interest ratio of around five or greater, this can be taken as a bearish signal, and vice versa.

RELATED TERMS
  1. Short Sale

    A short sale involves borrowing shares in anticipation of a price ...
  2. Weak Shorts

    Traders or investors who hold a short position in a stock or ...
  3. Short Selling

    Short selling is the sale of a security that is not owned by ...
  4. Days To Cover

    A measurement of a company's issued shares that are currently ...
  5. Short (or Short Position)

    Short or shorting is selling first and buying later, with the ...
  6. Buy To Close

    Buying to close involves purchasing an offsetting position to ...
Related Articles
  1. 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.
  2. Trading

    The Short Squeeze Method

    The short squeezed strategy can be risky - but also very rewarding - for those who master it.
  3. 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.
  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. 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.
  7. Trading

    Guide to Short Selling

    Want to profit on declining stocks? This trading strategy does just that.
  8. Financial Advisor

    Why You Should Never Short a Stock

    Short selling a stock means you are betting on the stock decreasing in price. Before taking on this investment, you should fully understand the risks
  9. Investing

    Bank of America Short Interest Declines Again

    With Bank of America shares trading at eight-year highs, short sellers continue to run away.
RELATED FAQS
  1. How Do I Find a Stock's Number of Shorted Shares?

    For general shorting information, you can usually go to any website with a stock quotes service. Read Answer >>
  2. What Part of a Company's Float Can Be Shorted?

    The quick answer: The number of shares shorted can actually exceed 50% of the float in a company. Read Answer >>
  3. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  4. 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 >>
  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. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center