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CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved. CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved.

What is short interest in stocks?

Short interest can serve as a useful indicator of how the market is moving, presenting traders with an opportunity to get exposure. Learn more about what short interest in stocks is and how you can trade with us.

Trader Source: Bloomberg

What is short interest?

Short interest represents the percentage of company shares that are sold short and haven’t been closed out. Traders will short-sell stocks if they believe that the share price will fall.

When there is short interest in stocks, there tends to be a prevailing sentiment that the price will fall. That means that traders are sceptical about a particular stock. These traders are known as bears.

Inversely, a rise in long interest for a particular company will indicate a low short interest ratio. That is when there is a strong indication that the stock price will rise.

You can track short interest reports from stock exchanges where the company is listed to discover if it is prone to short squeezes. This rate is presented as a percentage to indicate the number of shorted shares divided by the quantity of shares outstanding.

It is important to note that short interest in a stock does not imply an impending price drop. Even though it is not always the case, it is generally viewed as a negative indicator. However, you could still find some bullish traders that might see this as an opportunity.

The rate only serves as an indicator of the prevailing sentiment about a particular security, seen through an overwhelming number of traders selling their position or shorting the market.

Therefore, short interest reading must be supported by extensive technical and fundamental analysis of a market. This is important because short interest analysis can be conducted on individual stocks or on an entire industry.

Examples of how to use short interest

There are two ways to use short interest. Your trading strategy can dictate the best course of action when there’s a noticeable short interest in a market.

Firstly, you can track days to cover, which is a calculation based on the number of short positions in a stock divided by the trading volume. A high day to cover measurement could signal a short squeeze, which is where there is a sudden spike in price caused by a large number of short sellers holding their position.

For example, company XYZ has an average daily volume of 1 million shares. If traders short 2 million shares that have not been closed out, then the days to cover would be two days.

Another way of using short interest is to take a long position on a company that’s being short squeezed, in hopes that the price level will bounce back over time. Generally, when you opt for a long squeeze, you are pressured to sell your position based on the falling market in order to limit your losses.

By not selling, you are anticipating that the stock price will rise again. They may be required to buy more shares to cover or simply hold their position. There is always risk that the market may continue to fall for a longer period than you have anticipated. That is why it is important to take steps to manage your risk.

How to perform a short trade

You can perform a short trade on stocks that have short interest by using our contract for difference (CFD1) trading account. This derivative product enables you to predict on the direction of the price of the underlying asset, without taking outright ownership.

To get started, we have listed a few steps that can help you get ready to trade with us:

  1. Create an account or log in
  2. Search for your opportunity
  3. Select ‘buy’ to go long, or ‘sell’ to go short
  4. Set your position size and take steps to manage your risk
  5. Open and monitor your position

Short interest pros and cons

Pros of short interest

  • You can use short interest as an indicator of market sentiment before you get exposure
  • It can also offer you an opportunity to hedge your position against potential downside risk

Cons of short interest

  • Relying solely on stock exchange reports on short interest may result in loss as the indicators are not available in real time, potentially misrepresenting the market
  • Short interest may reflect uncertainty in the stock market at a certain point, possibly providing a sentiment about a particular stock that could change rapidly, leading to a short squeeze even though the short interest ratio is low

Short interest in stocks summed up

  • Short interest is defined as the number of company shares that have been sold short and have not been closed out
  • It is represented as a percentage that can be used as an indicator of investor sentiment in the market
  • You can use short interest to short-sell stocks with the aim to profit if the market price falls
  • The advantage of using short interest is that it can serve as an indicator of investor sentiments in the market. The disadvantage of using short interest is that it can be misrepresent the market as conditions may move rapidly than the report on shorted stocks
  • You can short stocks with us using our CFD trading platform

Footnotes

1 CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

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