The short Interest ratio is a simple formula that divides the number of shares short in a stock by the stock's average daily trading volume. Investors rely on a wide variety of analytical tools to formulate their predictions for upcoming market action. This will help mitigate some level of risk over time and ensure that investors have all possible information to inform their trades. A short interest ratio provides investors with an insightful overview of how many shorted shares have yet to be covered or closed. Visit performance for information about the performance numbers displayed above. Using the short interest ratio, an investor can quickly determine whether or not a stock is being disproportionately shorted relative to its fundamentals. Short interest, an indicator of market sentiment, is the number of shares that investors have sold short but have yet to cover. When an investor borrows the shares from a broker in order to sell them, they will eventually be required to return them. As the ratio increases, investors may think twice before entering a new short position. The ratio should always be compared with the actual short interest and trading volumes. A bear squeeze is a situation where sellers are forced to cover their positions as prices suddenly ratchet higher, adding to the bullish momentum. The ratio is used by fundamental and technical traders to identify trends.[2]. The chart below of Tesla shows the short interest ratio, the number of shares short, and the daily average trading volume. 22.10 % Short % Increase / Decrease. Short-interest theory states that high levels of short interest are a bullish indicator. NASDAQ data is at least 15 minutes delayed. The offers that appear in this table are from partnerships from which Investopedia receives compensation. A short interest ratio is one such resource. The short interest ratio is not to be confused with the short interest, a similar concept whereby the number of shares sold short is divided by the number of outstanding shares. It takes several days before the information is published and by that time, the number of shares short in the market may have already changed. Combine the information contained in the short interest ratio with the number of shares outstanding and the short percentage to get a more complete picture of a companys short interest. Additionally, one must consider how news or events may impact trading volumes and make the ratio expand or contract. That was because the daily average volume fell sharply during that time. To cut their losses, short sellers may add to demand by buying shares to cover short positions, causing the share price to further escalate temporarily. The short interest ratio is a quick way to see how heavily shorted a stock may be versus its trading volume. 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. Short interest refers to the total number of shares sold as a percentage of a companys total outstanding shares. Advanced Trading Strategies & Instruments, Investopedia uses cookies to provide you with a great user experience. To fully understand the implications of this formula, it is first necessary to explore the process of short selling. For example, if shares are shorted and the price increases, the investor will be required to buy back the securities they borrowed at the new, higher price. These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm. You can then sell the borrowed stock and collect your proceeds from the sale. Because you now owe your broker the number of shares you borrowed, you'll eventually have to purchase them. This is the number of shares sold short divided by the average daily trading volume. Short interest ratios can help investors recognize a stock's trend. The latter concept does not take liquidity into account. The short Interest ratio is a simple formula that divides the number of shares short in a stock by the stock's average daily trading volume. What Is a High Short Interest Ratio and the Potential for a Sizable Short Squeeze? For example, if 1000 shares of XYZ corporation have been sold short and an average of 100 XYZ shares are traded each day, then the days to cover ratio is 1000 100 = 10. By using Investopedia, you accept our. 5,330,000: Daily Short Sale Volume. The ratio is used by fundamental and technical traders to identify trends. Short interest measures the total number of shares that have been sold short in the market.