How to Read a Short Interest Ratio

Investors use the short interest ratio to help decide whether to open a long or short stock position. The ratio is calculated by dividing the short interest -- the number of shares that have been sold short -- by the average daily trading volume. The short interest ratio puts a number on the stock’s anticipated direction. If the short interest ratio is high, traders expect the stock price to continue its downward trend.

Step 1

Navigate to a financial website and enter the company stock symbol in the search box. Pull up the company’s financial information.

Step 2

Find and click on the "key statistics" tab to bring up the stock trading information. Locate the stock price history and share statistics information. Find the short interest ratio.

Step 3

Read the short interest ratio along with the number of stock shares short and the short percentage of the float. The short interest ratio reveals the number of trading days it would take for short sellers to close out their short positions. The number of stock shares short tells how many stock shares have been sold short. The short percentage indicates how much of the stock available for sale to the public has been sold short. For example, suppose a company's short interest ratio is currently 1.50. This means it would take 1.5 days for the shorts to close out their positions. A short ratio over seven or eight days means short sellers would have a difficult time trying to cover their positions.

Step 4

Track the short interest ratio to find which industries have increasing or decreasing short selling. For example, on Oct. 31, 2012, Nasdaq reported that the telecommunications industry had a short interest ratio of 15.54, while the financial sector had a short interest ratio of 3.29. Applying the short interest ratio to sectors and industries can help investors find or avoid stocks with high short interest.

Tip

  • 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 company’s short interest.

Photo Credits

  • Spencer Platt/Getty Images News/Getty Images

About the Author

Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.

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