What does this mean to the average stock investor? That may depend on whom you talk to because an increase in short interest can be interpreted several ways.
If investors believe stocks are over-priced and about to fall, they will short the stock and profit when the price drops. If the price does not drop, they must cover their position and buy back the stock at a higher price, which, if there are enough short sellers may drive up the price even higher.
Short Selling Defined
For more information read this article on selling short.Other investors don’t worry about short interest too much since selling short is often used by investors to hedge positions and, as a practical matter, short sellers are often wrong.
There is something you can do to monitor your individual stocks or to checkout stocks you may be considering for your portfolio.
Short-Interest Ratio
The short-interest ratio is a tool you can use to see whether short sellers believe an individual stock is about to fall in price. The ratio is calculated by dividing short interest by average daily volume of the stock.A ratio over two indicates the stock’s price may go up in the future as short sellers buy it to cover their positions. (Remember, in a short sale, the investor makes money when the stock’s price falls.)
A low short-interest ratio may indicate that short sellers feel the stock’s price will stay flat or fall.
One place to find this ratio of individual stocks in at SmartMoney.com. Enter the stock’s symbol, then look under “Profile” and you will find the “Ownership” category. There you will find the short-interest ratio.
