What Is Short Interest, And Why Does It Matter?

How do you judge Wall Street’s opinion of a stock? You could look at price, sure. But that doesn’t tell the whole story. Priceline Group Inc PCLN isn’t 10 times more valuable than Apple Inc AAPL. 

You could look at analyst ratings, but the opinions of a small number of people, though sometimes influential, doesn’t always speak for the hundreds of thousands of traders on Wall Street.

One tool many people use is short interest. Short interest is the measure of the total amount of shares that traders have shorted and not yet covered. In other words, the amount of shares currently being bet that the stock will go down.

Why Short Interest Matters

When looking at a stock for a potential investment, you want to know what percentage of Wall Street is betting against you. That’s what short interest tells you. The higher a stock’s short interest, the more bearish a signal it is. Generally, a short interest of 25 percent or more is considered high.

If you’re looking for a place to learn more about FinanceBoards and how to use the platform, FinanceBoards holds weekly webinars Thursdays at 4:30 ET.

A company’s short interest is constantly updated. The change can offer a clear narrative on how Wall Street’s willingness to actively short a stock has changed over time.
 

Putting Short Interest Into Practice

So, the real question here is how should this affect your analysis? Let’s take a look at a few examples using the Quandl Equity Short Interest widgets on FinanceBoards.

On June 9, a research note from Goldman Sachs comparing some of today’s biggest tech stocks to the dot-com bubble sent the sector spiraling. These “FAAMG” stocks -- Facebook Inc FB, Amazon.com, Inc. AMZN, Apple, Microsoft Corporation MSFT and Google / Alphabet Inc GOOG GOOGL-- were singled out in particular.

Aside from being flagged in the note, Apple has also seen a recent spike in short interest. The company reported a modest Q2 that was well-received by the market, boosting the stock to between the $153-$155 levels in early June before dropping to just under $150 after the note was published.

Here’s a breakdown of Apple’s short interest since February using the widget on FinanceBoards.

To learn more about the Quandl Equity Short Interest widget on FinanceBoards, check out their Widget Spotlight Series.

According to the widget, short selling in Apple near the end of May took a steep upturn to 63.20 million shares. Note the other two columns here: average daily share volume and days to cover. The latter represents the amount of time it would take everyone who’s short to cover their position. A days to cover of greater than two is considered bearish.

The increased short interest could indicate that more people aren’t feeling good about the stock at its current level.

Another stock that felt the brunt of the tech correction was Facebook which also dropped from $155 to $150 after the report was released.

Here’s a graphical representation of Facebook’s short interest.

Unlike Apple’s short interest, the charted version of the widget on Facebook’s lifetime short equity data shows a fairly stable pattern in short equity over the same four-month span. We can see the stock has low short interest and days to cover, relative to Apple.

So, how do you measure sentiment of a stock? Ideally, you should use a few different tools. Stock price and analysts ratings can help, but don’t underestimate the value of short interest. There’s no other metric that paints a more complete picture of who is betting on downside in a stock.

Disclaimer: WooTrader is a sponsored partner with Benzinga. This article was written in conjunction with WooTrader, and may have been subject to their approval.

Image credit: Pixabay