If misery loves company, what does happiness love? Solitude, perhaps?
We know that most traders lose money, and only a minority makes steady profits. A successful trade is likely to run in the direction opposite to that of the majority of traders. This is why it pays to know how much or how little company you will have when you short a stock.
Very few people sell short, and the total number of shares shorted is usually a tiny percentage of any company’s shares. If you want to measure the intensity of short-sellers’ involvement in any given stock, you have two indicators—the Short Interest Ratio and Days to Cover.
The Short Interest Ratio compares the number of shorts held by the bears with the “free float” in any given stock. The free float is the number of shares available for shorting. You find it by taking the total number of shares issued by the company and deducting three share groups: the restricted stock granted to executives, shares held by “strategic shareholders” who own more than 5% of company shares, and, finally, insiders’ holdings. When you subtract the number of shares that cannot be easily sold from the total number issued by a company, you find the number of shares that are in play—the free float.
Brokers report the number of shares that have been shorted and not covered to the exchanges, which summarize this information for every stock and disclose it to the public. If you divide the total number of shares that are being held short by the ...