Legal Definitions - short interest

Definition: Short interest refers to the number of shares in a short sale that have not been purchased for return to lenders. In a short sale, the seller borrows shares and sells them, hoping to buy them back at a lower price and make a profit. Short interest is the number of shares that have been sold short but not yet bought back.

Example: John believes that the stock of XYZ company will decrease in value. He borrows 100 shares of XYZ from his broker and sells them for $50 each, receiving $5,000. If the stock price drops to $40, John can buy back the 100 shares for $4,000 and return them to his broker, making a profit of $1,000. However, if the stock price increases to $60, John will have to buy back the shares for $6,000, resulting in a loss of $1,000. The number of shares that John has sold short but not yet bought back is the short interest.

Explanation: Short interest is an important metric for investors and traders who want to gauge market sentiment. High short interest indicates that many investors are betting against a stock, which could lead to a short squeeze if the stock price rises unexpectedly. A short squeeze occurs when short sellers are forced to buy back shares to cover their positions, driving up the stock price even further. On the other hand, low short interest suggests that investors are bullish on a stock, which could lead to a rally if positive news emerges.