What Is Short Interest?

Short interest can serve as a barometer of investor sentiment toward a stock, sector, or market. By definition, it represents the number of shares that have been sold short and remain outstanding.

Because short sellers are typically positioning for a move lower in the stock, rising short interest generally signals rising negative investor sentiment. Falling short interest sometimes suggests investors are becoming less bearish.

Like most indicators, traders typically don't use short interest as a standalone tool but in combination with other data and research. Released twice per month by the Financial Industry Regulatory Authority (FINRA), short interest is a snapshot of all open short positions on the books and records of brokerage firms at mid-month and end of month.

In stock trading, a short is a sale of a stock that the investor doesn't own. Because short selling involves borrowing shares from the brokerage firm, it also requires a margin account and collateral, such as bonds, cash, mutual funds, or stocks. As with most other forms of borrowing, interest is charged based on the value of the shares.

Again, short sellers are typically trying to profit from a move lower in the stock. The strategy is sometimes used within a larger portfolio for diversification. That's because short stock positions typically increase in value during down markets, which can offset losses in other assets like long stocks or funds that hold baskets of stocks. After shares are sold short, the outcome depends on the direction of the stock:

• If the stock moves lower, the short seller can buy back the stock, return the shares to the lender, and book a profit, minus any interest (which may be tax deductible).
• If the stock doesn't move higher or lower, the investor will see no gain or loss in the shares but will continue to pay interest. 
• If the stock moves higher, the short seller will lose money and pay interest. Losses are theoretically unlimited because there is no limit to how far a stock can climb.

After the trade is placed and executed, the proceeds of the sale will appear in the margin account. The account will continue to reflect the position until it's closed or "covered." To cover the short sale and close the position, the short seller purchases the stock in the market.

FINRA requires firms to report short interest positions in stocks for all their accounts twice per month by 6 p.m. ET. If the 15th of the month falls on a weekend, the numbers are due on the previous trading day. The goal behind publishing the data is "to help investors gauge the market sentiment surrounding a security or exchange," according to FINRA.

Analysts, investors, and traders watch changes in short interest to see if bearish traders are increasing or decreasing their positions in a specific stock or market. Rather than looking at the absolute level of short interest in a stock, they're often looking at a ratio rather than the total number of shares that are short. That's because a large company with billions of shares outstanding will likely have more short interest than a smaller company with a few million shares, but that doesn't necessarily indicate higher levels of bearish sentiment in the larger company.

The Stock Screener on schwab.com includes a short interest screener to scan for stocks with various levels of short interest relative to their total shares available for trading or the stock's "float." A stock with less than 10% of shares in the hands of short sellers might be viewed as having relatively low short interest and those with 20% or more are generally viewed as having relatively high levels of short interest.

High short interest can sometimes create a situation ripe for a short squeeze. When a stock with high short interest begins to rally, those with short positions might begin to feel the pain of financial losses. To mitigate losses, they might scramble to cover their shorts and buy the stock back, which feeds into the buying interest and the stock's rally.

Stock's with very high short-to-float ratios (50% or more) and smaller floats can be particularly prone to short squeezes. Also, some stocks can get so much short interest that brokers might run out of enough inventory to lend out the shares. These so-called "hard-to-borrow" stocks may no longer be short sellable and might also have hefty loan rates.

A final way traders use short interest is as a contrarian sentiment indicator. For example, if a stock has seen a dramatic drop accompanied by a spike in short interest, it could be a sign that bearish sentiment has reached an apex and the stock could be poised for a rebound.

Analysts, investors, and traders often pay attention to short interest updates because the numbers reflect sentiment toward a specific stock or market. Rising and falling levels can be a sign that investors are turning more bullish or bearish. Very high ratios might be a sign that the bears are circling the wagons in anticipation of a stock's demise, which can sometimes suggest that negative sentiment has reached an extreme and most of the bearish headlines have already been baked into the shares.