What it is:
Short interest is the number of shares or units of a security that have been sold short and not yet covered or repurchased. It is typically expressed as a percentage of the total securities outstanding.
How it works (Example):
Short Interest = 3,000,000/120,000,000 = 2.5%
Many financial publications and websites report the short interest for various stocks and securities at the middle and end of each month.
Why it Matters:
Short interest is an indicator of bearish sentiment for the market as a whole and for particular securities. Though Face value should be just one of several factors investors should consider when buying or selling, some analysts believe that securities with low short interests are less likely to experience price declines and short squeezes.
However, other analysts believe that securities with high short interest are more likely to increase in price because eventually the short sellers will have to buy the security to cover their short positions. Either way, large changes in a security's short interest often indicate big changes in investor sentiment, which is something worth investigating regardless of whether an investor intends to short a stock or not.