Short Interest Ratio
Definition:
Short interest ratio is related to short-selling (i.e., selling a stock you do not own with the hope that it will drop in price, at which time you may buy the stock at the lower
price and pocket the difference.) The formula is:
Short interest ratio indicates the number of days of normal average daily trading it would take to clear out the short interest. For example, if the stock trades 50,000
shares a day and has 150,000 shares sold short, it will take three days to clear out the short sellers. The short interest ratio would be 3.
A high short interest ratio is interpreted by some as a bearish sign, because short sellers are betting the stock will go down. However, short interest can be a bullish sign
if a stock is otherwise sound. In a buying market, short sellers are in a vulnerable position and will usually need to cover their sale, which can create buying pressure.
SHORT SALE
A short sale is an investment strategy used usually by experienced investors. The mechanics of a short sale are complicated and the investor's risks are high so it is
important that people understand the transaction before getting into it.
A short sale is the sale of securities that are not owned by the seller but are promised to be delivered. The seller plans to buy the securities, which he will then turn
around and sell, at a price that he hopes will be declining so that the price he pays will be less than what he sells them at. His profit is the difference between what he
paid for the stock and what the buyer pays him. When an investor "sells short" a security, a broker either lends him the security or borrows it from another customer or
brokerage firm in order to make delivery to a buyer. A short seller owes the lender of the securities any dividends or rights declared on the stock during the course of the
stock loan.
Short selling is subject to certain rules. First, all short sales must be made in a margin account. In addition, short sales of securities listed on an exchange must be
made at a higher price than the previous sale (a "plus tick"). Or, a short sale has to be made at a higher price if the two previous sales were at the same price but the
price before those was lower (called a "zero-plus tick"). A similar requirement is being implemented for the over-the-counter market. |
