Short Interest -- What It Is, What It Is Not
To understand what short interest is, we should first talk about short sales. Put simply, a short sale involves the sale of a stock an investor does not own. When an investor engages in short selling, two things can happen. If the price of the stock drops, the short seller can buy the stock at the lower price and make a profit. If the price of the stock rises, the short seller will lose money. An investor may engage in short selling for many reasons, such as to profit from a decline in the price of a stock or to hedge the risk of other positions.
To open a short position, an investor places a short sale order with their brokerage firm in a stock that the investor does not own. This is done in a margin account. Because the investor does not own the shares, the brokerage firm will look to "locate" shares prior to executing the short sale. These shares may be identified in the brokerage firm's inventory, the margin accounts of other customers or another source. Once the trade is executed, the investor's margin account will show the proceeds of the sale. Ultimately, the investor must obtain these securities to close the position. Until this occurs, the investor's account will reflect a short position. To close the position, the investor can purchase the stock in the market, which they hope will be at a lower price than they sold the shares short.
"Short interest" is a snapshot of the total open short positions in a security existing on the books and records of brokerage firms on a given date. Short interest data is collected for all stocks—both those that are listed and traded on an exchange and those that are traded over-the-counter (OTC). FINRA and U.S. exchange rules require that brokerage firms report short interest data to FINRA on a per-security basis for all customer and proprietary firm accounts twice a month, around the middle of the month and again at the end of each month.
Source Fool.com
