How Do I Find Short Interest for a Stock?

If the percentage of shorts in a stock were to hit 100% that would mean that every single available share of a stock had been sold and would have to be bought back before being available to be sold again. (Note: In reality, 100% would be effectively impossible to see, but it is useful to explain this concept.)

Motivated Buyers

Anyone who takes a short position in a stock is entering an interesting situation: In order to exit the position, he or she has to "cover" or buy back the shares that are being shorted. So if a stock has a very high percentage of its shares being shorted, it means that there are more investors who need to buy shares at some point, whether the stock goes up or down.

This is interesting because those who have already taken a short position need those who own the stock (or are "long") to sell their shares and push the price lower.

When Good News Is Actually Bad News

If a company comes out with positive news and more investors want to buy a stock -- pushing the price higher -- those with short positions can rack up losses quickly. For this reason, stocks with high short ratios are more prone to a big upward move, called a "short squeeze," in which what would have been a smaller rise in the share price is exacerbated by short covering, as those who are "short a stock" panic and buy back shares to cut their losses. (In November 2006, I wrote about a short squeeze in Crocs (CROX Quote) -- A Tight Fit for Crocs' Shorts.)

Short Percentages in 'Safer' Stocks

Large-cap blue-chip stocks tend to have an extremely low short position relative to their float. This is due to a number of factors, including the sheer amount of stock that is being held my mutual funds and other institutions, as well as the simple fact that anyone looking for a stock that could go down significantly will generally not be interested in these stocks, which are safer and significantly correlated to the broad economy.