What is a 'Short Interest Ratio'

A short interest ratio is the ratio between the numbers of shares of a stock being short sold at a given time to the total number of shares available for trade on a given day. Also known as the days to cover ratio, it is used by investors to measure market sentiment toward a specific stock.
Short Interest Ratio

BREAKING DOWN 'Short Interest Ratio'

Short selling is a trading strategy used by traders who want to bet that a stock price will fall. To short sell a stock, an investor borrows shares of that stock, promising to repay the stockbroker at a later date, and immediately sells those shares on the open market. When the shares do fall in price, the investor buys them on the open market, and repays the stockbroker with the now cheaper shares, profiting by the amount the stock fell in price.

Short selling can be risky however, because the potential losses are limitless. If you buy a stock, the most money you can lose is the amount you bought the stock for. If you short sell a stock, your potential losses are infinite, as there is no technical upper bound to how much a stock can grow in value. That’s why short sellers must pay very close attention to the short interest ratio, because it tells them how many days of trading would be required for them to cover their shorts, or repay the borrowed stock to their brokers.

The short interest ratio is also a useful measure for other investors to measure the overall market sentiment toward a specific stock. If the short interest ratio is very high, that means investors are shorting a large share of a company’s outstanding stock, suggesting that many investors expect the stock to fall in price.

Example of Short Interest Ratio

Let’s say you are an investor who wants to sell short stock in the New York Tire Company, because you believe that the CEO is too aggressively cutting prices in an ill-conceived plan to gain market share. The average volume of stock sold each day is 1,000 shares, while the number of shares being sold short is 200. That means the short interest ratio is 0.2. After one week, many other investors begin to agree with you, and now the number of shares being shorted is 800, meaning the short interest ratio has now risen to 0.8. This rising short interest ratio indicates a growing bearish sentiment for the stock of the New York Tire Company.
 

RELATED TERMS
  1. Short Sale

    A short sale is the sale of an asset or stock unowned by the ...
  2. Days To Cover

    Days to cover is a measure of a company's issued shares that ...
  3. Short Squeeze

    A short squeeze is when a heavily shorted security moves sharply ...
  4. Short (or Short Position)

    Short or shorting is selling first and buying later, with the ...
  5. Rebate

    A rebate in a short-sale transaction is the portion of interest ...
  6. Long-Short Ratio

    A long-short ratio represents the amount of a security available ...
Related Articles
  1. Investing

    Why Short Sales Are Not For Sissies

    Short selling has a number of risks that make it highly unsuitable for the novice investor.
  2. Financial Advisor

    The 5 Most Shorted NYSE Stocks

    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.
  3. 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.
  4. 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.
  5. Trading

    Understanding Short Covering

    Short covering is buying back borrowed securities to close an open short position.
  6. Investing

    Bank of America Short Interest Declines Again

    With Bank of America shares trading at eight-year highs, short sellers continue to run away.
  7. Investing

    Short Sellers Profit Big Off Intel, Nordstrom, Priceline

    Short sellers generated strong returns by shorting stocks May 8 – 12.
  8. Investing

    4 ETFs to Short the Market

    In this article, we'll explore four exchange-traded funds (ETFs) that allow you to short a market segment or sector, which can help investors earn a profit during market corrections.
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 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 >>
Trading Center