Short interest is the number of shares that investors in aggregate have sold short of a stock that they haven’t yet covered. Investors generally sell short a stock in hopes that the stock will fall, thus making a profit for shorts when not factoring in the borrowing costs.
Short Interest can be an Indicator When Combined With Other Metrics
The short interest of a stock is generally reported bimonthly by the NASDAQ and is often combined with other metrics to make sentiment indicators. One important indicator investors use is short interest to float percent.
If the short percent to float metric is rather high, it can indicate long term bearishness as there is something about the company that has caused some investors in the market to bet against it. If a stock’s short interest to float metric is high versus its peers or the sector average, it can be prudent for investors to do more research into the fundamentals about that company.
In the short term, higher short interest to float can be similar to rocket fuel for short squeezes if there is unexpectedly amazing good news. Short squeezes are generally gigantic moves up in a short amount of time due to shorts being forced to cover some of their position. Short squeezes happen largely due to unexpected events that catch the shorts off guard.
More on Short Interest
Although generally a bearish indicator, a stock with high short interest to float is not necessarily bearish for fundamentals if that company executes. The management team of Tesla, for example, has executed very well in recent years and in turn the stock has rewarded its shareholders with solid performance since the IPO despite Tesla’s rather high short interest to float ratio.
Similarly, a stock with higher short interest to float might not sink as much in unrestrained bull markets when investors don’t necessarily pay as much attention to certain fundamental factors as they normally would.
Read more helpful articles at The Complete Guide to The Short Squeeze: An Educational Article List.
Disclosure: No Positions