For traders who intend to profit from declining stock prices, short sale volume data can be a useful metric to add to your technical analysis. It not only gives an indication of the amount of shorted shares of a stock, but it can also be used as a measure to gauge market sentiment.
This article looks at what short sale volume data is and how you can gauge market sentiment and ultimately improve your strategy when trading through your brokerage.
What Is Short Selling in Trading?
Short selling is a trading strategy that seeks to profit from a decline in the price of a stock, though it also bears risks. A short seller borrows securities from his broker, then sells the security in the market in hopes of buying it back at a lower price. The risk is that If the stock price rises, losses could hopefully be unlimited.
For example, if after fundamental or technical analysis, you are convinced that the price of a stock will decline, you borrow the stock from your broker or dealer and sell it on the market.
Hopefully the stock price declines, you buy it back again, this time at a cheaper rate and return the stock to your broker. The difference between the amount you sold and bought would be your profit, or loss if you had to buy it back at a higher price.
What Is Short Sale Volume Data?
Short sale volume data is information on the total number of shares of a particular stock that have been sold short by investors in a given time presented as a ratio. It does not take into account the number of trades made to close short positions.
Where to Find Short Sale Volume Data
Traders can find short sale volume data from major exchanges and reputable financial news platforms like Benzinga. Several self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA) also provide daily aggregate short-selling volume information reported to them.
How to Interpret Short Sale Activity
Short sale activity allows investors to gauge the market sentiment surrounding a particular stock. If a stock has a high amount of short volume, this suggests that investors are bearish. Investors can also use short volume to ascertain the magnitude of the pressure on the stock from institutional investors.
What Can Short Volume Indicate?
As investors are looking at a stock chart, they may consider using short volume to develop their investment strategy toward a stock. If a stock has a high short volume, this can indicate that the overall market sentiment on the stock is bearish. Some investors may think about shorting the stock or wait on the sideline until sentiment on the stock changes.
Other investors may see high short volume as an opportunity to buy a stock. If a stock has a high short volume, short sellers may be forced to liquidate and cover their position by purchasing the stock.
If the price of the stock goes higher, short sellers may be forced to exit their positions and buy the stock back, which could ultimately send the price of the stock even higher. This is called a short squeeze. Short squeezes can occur if stocks hit stop-loss levels or as margin requirements increase and short sellers run out of capital to maintain positions.
Retail investors initiated a short squeeze on meme stocks GameStop Corp. (NYSE: GME) and AMC Entertainment Holdings Inc. (NYSE: AMC) back in 2021 when hedge funds had put on short positions.
Short Sale Volume vs. Short Interest Volume
Though both short sale volume and short interest volume seem similar, their meanings are actually quite different. Short sale volume measures the amount of shares that have been shorted in a given period. Short interest volume is the number of shorted shares that are yet to be closed by investors. It can also be analyzed as a ratio — a percentage of the total volume traded. It may also be reported as an average over a specified period.
Gauge Investor Sentiment at a Glance
Short sale volume is a metric investors can use to gauge investor sentiment on a stock. It is easy to understand and does not require complex calculations. But traders often overlook this metric despite the widespread availability of the data. Using a stock's short sales volume can give you insight into stock trading patterns.
Frequently Asked Questions
Is short selling profitable?
Short selling can be profitable, but risky. You sell a stock you don’t own, hoping the price drops, then buy back lower. But if the price rises, unlimited losses may result. Only experienced investors should consider it.
Can you short sell without a broker?
To short sell a stock, you would need to borrow shares to sell. This lending process can only be facilitated by a broker.
What is the 10% rule for short selling?
The “10% rule” for short selling refers to a restriction that prevents traders from shorting a stock if its price has dropped more than 10% from the previous day’s closing price. This rule aims to prevent excessive short selling and market manipulation during significant price declines. The rule is part of regulations to maintain market stability and protect investors.