Stock Short Selling

• Short selling is a technique used by stock traders to sell stock they do not own and buying the shares back at a lower price, profiting from the decline in the stock price. To sell a stock short, a trader borrows the shares from his broker. The money from the sale is restricted in the trader's account until the shares are repurchased in the market and returned to the broker. Short selling transactions are all completed electronically through the broker's trading system. A short sell will lose money for the trader if the stock goes up in price rather than decline.
  
  

Short Interest Ratio

• The short interest ratio is a calculation showing how much of a particular stock's shares have been sold short by traders. The short interest ratio is calculated by dividing the number of shares of a stock currently sold short by the average daily trading volume of the stock. The resulting ratio is the number of trading days to cover the short interest in a stock. For example, if a stock has 100,000 shares currently sold short and the stock has an average daily volume of 10,000; the short interest ratio is 10.
  
  

Short Interest Resources

• Short interest data is provided by the major stock exchanges, the NYSE and NASDAQ. Free short interest data from the exchanges is provided twice a month, as of the 15th and end of month. The exchanges charge a premium for more frequent short interest and short interest ratio data. Traders who need up-to-date short interest ratios can subscribe to a short interest service, either through one of the exchanges or a private data provider.
  
  

Short Interest Indications

• Traders and investors use short interest ratios to see which stocks have increasing ratios, indicating more traders believe the stock will decline. Short sellers tend to be sophisticated traders and increasing short interest is not a positive sign for a stock's price. As a contrary indicator, a very high short interest ratio may indicated a pending short squeeze. A short squeeze occurs when a stock with high short interest starts to increase in price. Traders short the stock start to buy shares to cover their short positions, pushing the stock even higher.