Short Interest Ratio

A mathematical indicator of the average number of days it takes for short sellers to repurchase borrowed securities in the open market

What is the Short Interest Ratio?

The short interest ratio is a mathematical indicator of the average number of days it takes for short sellers to repurchase borrowed securities in the open market.

 

Short Interest Ratio

 

Summary

  • The short interest ratio is a mathematical indicator of the average number of days it takes for short sellers to repurchase borrowed securities in the open market.
  • The ratio is calculated by dividing the total number of shorted shares of a stock by the average daily trading volume.
  • When the short interest ratio is high, the number of shares that can be repurchased in the open market after short selling is high, and similarly, if the short interest ratio is low, it means that the number of shares that can be repurchased in the open market after short selling is low.

 

How to Calculate the Short Interest Ratio

The short interest ratio is calculated by dividing the total number of shorted shares of a stock by the average daily trading volume (ADTV). To put it in a formula:

 

Short Interest Ratio - Formula

 

What Does the Short Interest Ratio Imply?

The short interest ratio is a mathematical indicator in finance. It depends on two factors – short interest and average daily trading volume. It ultimately indicates whether it is the right time to short sell.

When the ADTV is high, the short interest ratio is low. When the ADTV is low, the short interest ratio is high. Similarly, when the total short interest is high, the ratio is high, and when the total short interest is low, the ratio is low.

It indicates how high or how low the shorted shares are compared to the average daily trading volume. When the short interest ratio is high, the number of shares that can be repurchased in the open market after short selling is high. Similarly, if the short interest ratio is low, it means that the number of shares that can be repurchased in the open market after short selling is low.

 

What is the Days to Cover Ratio?

The short interest ratio is often used interchangeably in place of the days to cover ratio. The days to cover ratio is similar to the short interest ratio and measures the anticipated number of days to cover a position on the shorted shares issued by a company.

Therefore, the days to cover ratio basically represents the total number of days for short sellers to repurchase their borrowed shares from the open market.

Hence, when the days to cover ratio is high, it is a bearish indicator. Conversely, if the days to cover ratio is low, it is a bullish indicator.

 

Short Interest (SI) vs. Short Interest Ratio (SIR)

The short interest ratio is the ratio of short interest to the average daily trading volume. Short interest is a part of the short interest ratio but is not the same as the ratio. Short interest is the number of shares that are short sold divided by the total number of outstanding shares.

A key difference between them is that the short interest ratio takes liquidity into account since it considers the ADTV. On the other hand, short interest does not take the ADTV into account; hence, it does not account for the liquidity prevailing in the market in its calculation.

 

Related Readings

CFI offers the Capital Markets & Securities Analyst (CMSA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Financial Ratios
  • Trading Securities
  • Short Selling
  • Volume of Trade

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