What is short interest?

Key takeaway: Short interest measures the number of shares that have been sold short but not yet repurchased. It helps investors gauge bearish sentiment, evaluate market positioning, and understand why some stocks become vulnerable to short squeezes and sharp price moves.

This is the second article in our series covering everything you need to know about short selling. The previous article took an in-depth look at exactly what short selling is, who the main players are, and common tactics involved.

Short interest measures the number of shares in a company that have been sold short by short sellers but have yet to be repurchased.

Investors frequently monitor short interest because it can provide insight into market sentiment, potential risks, and, in some cases, the possibility of a short squeeze.

If a stock’s short interest is high, it suggests that a significant number of investors are betting that the share price will decline.

As a result, short interest is often viewed as a gauge of bearish sentiment among short sellers, although it does not necessarily reflect the views of the market as a whole.

However, while high short interest can indicate widespread skepticism about a company's prospects, it does not necessarily mean a stock will decline. Nor does it guarantee a short squeeze.

Online used-car retailer Carvana is a good example for understanding how investors calculate and interpret short interest, having periodically been one of the most heavily shorted stocks in the U.S. market.

Short interest is one of the most closely watched metrics in short selling.

Understanding what short interest measures, and what it does not, can help investors interpret one of the market's most closely watched indicators.

What does short interest measure?

When an investor sells a stock short, the position remains open until the borrowed shares are repurchased and returned to the lender.

Short interest measures the total number of shares that have been sold short but not yet repurchased.

For example, if investors have sold 10 million shares of a company short and none of those positions have been closed, the company's short interest would be 10 million shares.

Stock exchanges regularly publish short interest data, allowing investors to see how many shares are currently held in open short positions. In the U.S., for example, short interest data is collected by the Financial Industry Regulatory Authority (FINRA) and disseminated through exchanges such as the New York Stock Exchange (NYSE) and Nasdaq.

On its own, however, the raw number is often difficult to interpret. A short interest of 10 million shares may be significant for one company but insignificant for another depending on how many shares each company has available for trading.

In Carvana’s case, the company had roughly 39.6% of its public float sold short in February 2024, according to Ortex data.

At the time, investors betting against the company had built approximately $2.32 billion worth of short positions, reflecting widespread skepticism about Carvana’s valuation and growth prospects.

This example also highlights that investors rarely focus solely on the raw number of shares sold short.

Instead, they often use additional metrics, such as short interest as a percentage of float and days to cover, to better understand the scale of short positioning.

Short interest as a percentage of float

One of the most common ways to evaluate short interest is as a percentage of a company's public float, meaning the number of shares that are freely available for trading in the market.

The public float excludes shares held by insiders, executives, and other long-term holders that are unlikely to trade regularly. This makes it a more meaningful comparison for short interest than total shares outstanding, which includes those already owned.

While there is no universally accepted threshold that automatically makes a stock heavily shorted, many investors view short interest below 5% of float as relatively modest, while levels above 20% indicating heavy shorting and investors may begin paying closer attention to the potential for increased volatility.

This illustrates how significant it was for around 39.6% of Carvana’s public float to be sold short in 2024.

Short sellers were concerned about several aspects of the business, including Carvana's large debt burden, questions surrounding the sustainability of its rapid growth, and whether the company could generate sufficient profitability to justify its valuation.

These concerns intensified following a sharp rise in interest rates and a slowdown in the used-car market, leading many investors to question the company's long-term financial outlook.

What is days to cover (DTC)?

Another widely used metric is days to cover, sometimes called the short interest ratio.

Days to cover estimates how long it would take short sellers to close their positions based on a stock's average daily trading volume.

A higher days-to-cover figure can indicate that short sellers may face greater difficulty exiting their positions quickly.

Why do investors watch short interest?

Investors monitor short interest because it can provide clues about how the market views a company.

A high level of short interest often suggests that a significant number of investors believe the stock is overvalued or that the company's fundamentals may deteriorate.

In some cases, short sellers correctly identify problems before they become widely recognized.

For example, short sellers were among the most vocal critics of German payments company Wirecard before it collapsed in 2020 following the discovery of a multi-billion-euro accounting fraud. The company's elevated short interest reflected concerns that ultimately proved justified.

However, high short interest can also attract investors looking for opportunities on the opposite side of the trade.

Some investors believe that a high short interest and extreme bearish sentiment may already be reflected in the share price, potentially creating opportunities if the company performs better than expected.

For example, a stock that has attracted significant short interest may already have declined substantially as investors anticipate weak earnings, slowing growth, or other problems. If the company later delivers better-than-expected results, investors may reassess their outlook and push the share price higher.

In these situations, rather than seeing high short interest as a reason to avoid a stock, some investors see an opportunity because expectations have become overly negative and there may be greater scope for positive surprises.

Short interest and short squeeze

One reason short interest receives so much attention is its connection to short squeezes.

A short squeeze occurs when a rising share price forces short sellers to buy back shares to limit losses or satisfy margin requirements.

Because short sellers must eventually repurchase the shares they borrowed, their buying activity can push the stock price even higher, triggering additional short covering and creating a feedback loop known as a short squeeze.

This dynamic was visible during the GameStop rally in 2021.

GameStop had one of the highest short interest levels in the market, with more shares sold short than were readily available in the public float. As buying pressure increased, many short sellers were forced to close positions, contributing to a dramatic surge in the stock price.

Importantly, high short interest alone does not guarantee a short squeeze.

Many heavily shorted companies never experience one. However, elevated short interest increases the potential buying pressure that can emerge if market sentiment unexpectedly shifts in a company's favor.

The limitations of short interest

Despite its popularity, short interest has several important limitations.

First, short interest does not indicate whether short sellers are actually correct. Some heavily shorted companies ultimately collapse like Wirecard, while others recover and outperform expectations like GameStop.

Second, short interest data is reported periodically rather than in real time. This means investors are often looking at information that may already be several days old.

Third, high short interest alone does not prove that a company is being manipulated or unfairly targeted by investors. In many cases, it simply reflects widespread skepticism about a company's prospects rather than any coordinated effort to drive the share price lower.

Short sellers, like all market participants, may have valid reasons for their views, even if those views ultimately prove incorrect.

For these reasons, short interest should generally be viewed as one data point rather than a standalone investment signal.

Short interest vs short volume

Short interest is also often confused with short volume, but the two metrics measure different things.

Short interest represents the total number of open short positions that remain outstanding, while short volume measures the number of shares sold short during a specific trading period, usually a single day.

In simple terms, short interest is a stock measure while short volume is a flow measure.

A stock can experience high short volume on a particular day without seeing a significant change in overall short interest if many short positions are opened and closed during the same period.

Understanding this distinction can help investors avoid one of the most common misconceptions surrounding short-selling data.

Key takeaways

Short interest measures the number of shares that have been sold short but not yet repurchased, making it one of the most widely followed indicators of bearish sentiment in financial markets.

By examining metrics such as short interest as a percentage of float and days to cover, investors can better understand the scale of short positioning in a stock and assess the potential for increased volatility or even a short squeeze.

However, short interest should not be viewed in isolation.

While elevated short interest may signal concerns about a company's valuation or fundamentals, it can also create opportunities if market expectations prove too pessimistic.

Ultimately, short interest is best viewed as a tool for understanding investor positioning rather than a prediction of future share price performance.

Like any market indicator, it is most useful when considered alongside a company's fundamentals, valuation, and broader market conditions.