» Stock Trading Strategies and Systems » Short Interest Ratio Monitoring

Short Interest Ratio Monitoring

There are many investing tactics you can choose from. One of them is called selling short. This strategy is applied if the investor anticipates a fall in the price of a stock. If this is the case, the investor borrows a particular number of shares and sells them at the still high price. When the price drops, the investor purchases stocks at the lower price in order to repay his/her debt. As you can calculate money are left to the investor, which represent his/her profit. However, if the investor's expectations about a falling price are not met and instead the price rises, then s/he will sustain losses.

Selling short has turned to a major occupation of some investors and even companies. They strive to find companies which are experiencing difficulties by examining their financial statements. Additionally, they may consider a stock overpriced and that the time has come for the market to reduce its price.

Short interest represents the indicator that stock exchanges keep a close eye on in order to make a view on the activities of short-sellers. The short-interest ratio represents the short interest/average daily volume of stocks that is being traded on the market.

If the value of the short interest is high or steadily going up, then the stock is considered to go down in the coming days. This should represent a sign for you to reconsider your investments. Additionally, you can refer to the news reports and research works in order to check the opinion of analysts on the future movement of the stock. However, you should not always consider high short interests as a red flag for you to stop and not invest in the particular stock, because short sellers are not professionals that are always right.

In order to check the number of days that are needed for short-sellers to cover their positions if a good news increases the price of the stock, you should refer to the short-interest ratio. The coverage of their positions will be done through the purchase of stocks. However, the higher the value of this ratio is the more days the short-sellers will need to buy stocks in order to cover their positions when the price rises.

Finally, you should not use short-interest ratio in order to base your investment decisions on it. You should only apply it as a tool to see the potential future movement of the stock and see if this is in compliance with your trading activities.

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