What is a Short Interest Ratio?
A short interest ratio 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 average daily trading volume.
How Does a Short Interest Ratio Work?
Let's assume that Company XYZ has 3 million shares sold short and 30 million shares traded on average every day. By using this information, we can calculate that Company XYZ's short interest ratio is:
Short Interest Ratio = 3,000,000/30,000,000 = 10%
Many financial publications and websites report the short interest ratios for various stocks and securities at the middle and end of each month.
Why Does a Short Interest Ratio Matter?
Short interest, and by extension the short interest ratio, is an indicator of bearish sentiment for the market as a whole and for particular securities. Though short interest ratios should be just one of several factors investors should consider when buying or selling, some analysts believe that securities with low short interest ratios are less likely to experience price declines and short squeezes.
However, other analysts believe that securities with high short interest ratios 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 ratio often indicate big changes in investor sentiment, which is something worth investigating regardless of whether an investor intends to short a stock or not.
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