What is the short interest ratio?

The short interest ratio, also known as the short interest or short ratio, is a financial metric used to measure market sentiment towards a particular stock. It is calculated by dividing the total number of shorted shares of a company by its average daily trading volume. The short interest ratio is expressed as a percentage or a ratio.

Formula for Short Interest Ratio:
Short Interest Ratio = Total Number of Shorted Shares / Average Daily Trading Volume

For example, if a company has 1 million shares that have been sold short (shorted shares), and its average daily trading volume is 500,000 shares, the short interest ratio would be:

Short Interest Ratio = 1,000,000 / 500,000 = 2

In this example, the short interest ratio is 2, meaning that it would take approximately 2 days of average trading volume to cover all the short positions in the stock. A higher short interest ratio indicates a higher level of short interest in the stock, implying that there is a significant number of investors betting against the stock, anticipating its price to decline.

The short interest ratio is closely monitored by investors and traders as it can provide insights into market sentiment. A high short interest ratio might indicate that there is bearish sentiment towards the stock, while a low short interest ratio could suggest a more bullish outlook.

It's important to note that the short interest ratio should be interpreted in conjunction with other fundamental and technical indicators when making investment decisions. It is just one of many factors to consider when analyzing a stock's potential performance in the market.