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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
Short Interest is the number of shares that investors are currently short a stock. It is usually expressed as a percentage -- IE, the percentage of outstanding shares of a company that are shorted by a company. Short interest, even when expressed as a percentage, is nevertheless distinct from a company's short interest ratio.
While short interest is usually calculated for a particular company, it can also be calculated for an index or exchange as a whole (for example, the number of shares that investors are currently short across all companies in the S&P 500.
Significance of Short Interest
Because any investor that is "short" a stock is betting the price will go down, the percentage of shares that are sold short is a measure of investor sentiment for a stock. The larger the short interest, the more "bearish" investors are.
Sometimes, if the short interest in a stock is very large in comparison to the stock's volume, it can presage dramatic increases in a company's stock price when investor sentiment changes. This is because short sellers must buy shares of a company to close out their short position. So, if news about a company improves, some short sellers may decide they no longer wish to be short the stock, and will therefore buy the stock in order to get rid of their short position. If many short sellers are trying to close out their positions, and there aren't enough shares to buy, the stock price can rise dramatically. The short interest ratio, also known as the days to cover ratio, compares the short interest in a stock to the average daily volume, which can help investors estimate how difficult it will be for short sellers to cover their positions if news about the company improves.
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