Short interest is the number of shares sold short as a percentage of float. Float is the percentage of the total number of outstanding shares which is in the hands of investors and can be freely traded. Short selling is a technique to profit from a share price decline. A decrease in short interest vs. float means diminishing interest in a stock on the part of short sellers.
Short sellers attempt to profit from a stock’s decline by borrowing shares from a broker and selling them in the expectation of buying those shares back at lower prices and keeping the difference.
Short sellers close out their positions by buying back the borrowed shares which they sold short -- a process called short covering, or covering short positions. Longs -- investors who “go long” by buying stocks -- can hold their shares for as long as they wish because they own them; short sellers must cover their short positions and return the borrowed shares to their rightful owners at some point because they have sold stock that does not belong to them.
Short interest can be a useful short-term indicator. An increase in short interest may indicate that the stock is in a precarious technical position and could fall or correct; a decrease in short interest indicates that shorts are losing interest and the stock could rise. A decrease in short selling could slow a stock’s decline; the stock price could be pushed higher when shorts buy back shares to cover their short positions.
A sudden drop in a previously large short interest may precipitate a short squeeze. When shorts rush to cover, especially in a thinly traded stock, longs may withdraw their offers to sell, or even step up their own buying. The buying frenzy may spike the stock price, forcing shorts to cover at any price, sometimes at a loss, while producing quick profits for the longs.
- U.S. Securities and Exchange Commission: Short Sales
- “How to Make Money Selling Stocks Short”; William O’Neil with Gil Morales; 2005
- “How to Make the Stock Market Make Money for You”; Ted Warren; 1966