Short Interest Ratio
In technical analysis and fundamental analysis, a ratio of the short-sold shares of a publicly traded company to the trading volume over a given period of time. This is an indication of the market's sentiment regarding a particular stock. A higher ratio indicates a feeling that the stock will decline in value, while a lower ratio indicates general belief that it will rise. It is not an exact indication, as it fails to take into account matters such as the potential exercise of convertible shares. Fundamental analysts interpret a high ratio as bearish because it shows an expectation for lower prices; on the other hand, technical analysts see a middling ratio as bullish as it may indicate a demand for a stock among hedge funds unable to cover a short sale. The short interest ratio is also called days to cover. See also: Hedge fund.
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A ratio that is used for market analysis and is calculated by dividing short interest by average daily volume. Technicians use the short-interest ratio as a tool to determine market direction. A relatively high ratio is generally considered bullish because it indicates significant future buying pressures as short sellers cover their short positions. A low ratio is considered bearish. Also called days to cover.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.