Posted in Finance, Accounting and Economics Terms, Total Reads: 231
Definition: Short Interest
Investors short sell the shares of the stock when the price of the stock is going to decrease in the future. So these number of shares that has been sold short by investors but not yet covered or Closed Out is called short interest.
When the price of share is anticipated to come down in the future, investors borrow those shares from brokerage firm and sell them. Then when the price comes down, investors buy back that number of shares and close or cover the position. In the process, investors make profit by buying back the shares at lower prices. So the number of shares that have been sold short but are not yet covered is called short interest. Short Interest is the measure of market sentiment. Short Interest is measured as a number or a percentage.
When Short Interest is expressed as a percentage, it is called Short Interest Ratio. Short Interest ratio is defined by the ratio of number of shares sold short to number of shares outstanding. If this short interest ratio is high, it means that the price of that share is going to reduce in the future. If it is low, it means that very few investors are short selling the shares so it is unlikely that share price is going down.