Written by:
Image
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades.

Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

View all posts
Updated September 30, 2020

What is the Short Interest Theory?

Short interest theory suggests that a high level of short interest indicates an imminent rise in the price of a stock.

How Does the Short Interest Theory Work?

Short interest theory posits that a high number of outstanding short positions on a stock predicts that a rise in the stock's price is likely to occur in the near future. The assumption is that as traders and investors begin to repurchase the stock in order to return the shares to the registered owners, the increasing demand places upward pressure on the price as traders repurchase owed shares. 

For example, if short interest is high for stock XYZ, and XYZ is priced at $20, short interest theory states that the price will rise beyond $20 as traders covered their short positions (buy shares of XYZ) in order to close them out.

Why Does the Short Interest Theory Matter?

As short seller rush to repurchase shares of stock at the lowest possible price, the collective demand spike results in a fast-paced rise in the price of the stock. This is called a "short squeeze."

Ask an Expert about Short Interest Theory
At InvestingAnswers, all of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Short Interest Theory.
Be the first to ask a question

If you have a question about Short Interest Theory, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Short Interest Theory, then please ask Paul.

Ask a question Read more from Paul

Read this next

Don't Know a Financial Term?
Search our library of 4,000+ terms
Paul Tracy - profile
Ask an Expert about Short Interest Theory

By submitting this form you agree with our Privacy Policy

Share
close