When investing in stocks how do short interest shares work?

Question

Just wondering.

Answer 1

It pretty much works like any other short sale.

The stock is sold for much less than it's worth and initially takes a loss with the intent of repurchasing it later on.

The person who is selling the shares doesn't own them, they are essentially borrowing them from the share owner with the promise of returning the security.

Answer 2

I believe you are asking about short interest when it comes to the volume in the market.  If a company has a high level of short interest on its shares, that means investors think it is going to go down.  If the level is low, not many investors are against the company.

Where is gets tricky is what side do you want to be on?  Do you short the stock as well to make money when the price decrease (borrow the shares and sell them at $10 and buy them back when it drops to $8).  OR, do you buy the stock now at $10 knowing that the shorts will need to be covered?  When the investors shorting the stock cover, the price will increase.

Ron

Investment Advisor

Answer 3

There is no such thing as a short interest share. I think that you are referring to short selling.

Short selling is the opposite of buying stocks - it's the selling of a security that the seller does not own, done so in the hope the price will fall. If you feel a particular security's price, let's say the stock of a struggling company, will fall, you can borrow the stock from your broker-dealer, sell it and get the proceeds from the sale. If, after a period of time (e.g. 1, 2, 20 days) the stock price declines, you can "close out" the position by buying the stock on the open market at the lower price, return the stock to your dealer-broker and realize a gain.

The catch is, if the stock price rises, you lose money since you have to buy the stock back at a higher price. And the dealer-broker has the discretion to demand that the position be closed out at any time, regardless of the stock price. However, this demand typically occurs only if the dealer-broker feels that the creditworthiness of the borrower is too risky for the firm