We can make money in the stock market while stock is going up and when it’s going down. If you want to make money while it’s going down, you have to short the stock.
However, there are several terms that we have to keep in mind. One is a short interest float.
The number of shares a public company issues is known as “outstanding shares.” However, not all of these shares are publicly available for purchase. The number of publicly available shares on the stock market is known as “shares float.”
We can purchase these shares and hold them in our brokerage account. However, many brokerages have options where they will allow others to borrow your share with your permission. In return, you would get interest payment on the borrowed shares.
Even if the brokerage doesn’t ask your permission, they still can lend your stocks to others and pocket the interest for themselves. It happens in discount brokerages, especially at Robinhood.
Those who borrow shares immediately sell them to open a short position. The number of shares that have been sold as short is known as “short interest float.”
Let’s see an example to clarify these terms.
Suppose company XYZ had a total of 120 shares. So, the number of outstanding shares is 120. However, if XYZ releases 100 shares on the stock market to raise capital, then the shares float is 100.
Our shares stay in our brokerage account. The brokerage may allow others to borrow these shares at an interest rate.
The concept is similar to a bank. In our bank, we keep the money. However, banks lend this money to others at interest. In return, we get interest payments on our deposit and other financial services.
Now, out of those 100 shares, if brokerage lends 30 shares to others and they sell it, now 30 shares short. Then the short interest float is 30.
The short interest float can either be represented in numbers or percentages. So, for the above example, 30 (short share) / 100 (float share) x 100 = 30% shares are short.
Due to complex stock market mechanisms and less SEC regulation, this short float percentage could become more than 100%. As the Security Exchange Commission does not regulate short-sellers, it could create complicated situations.
For example, until December 2020, GameStop $GME had a short interest of 139%. It means some short-sellers shorted the stock twice. In January 2021, this short interest rose to 250%. As a result, there was a massive short squeeze that bankrupted a few short sellers hedge funds.
Therefore, if the short interest float percentage is higher, it’s safe not to short the stock.
How to Find Short Interest Float:
There’s an easy and free way by which we can find out the number of shares that are short in a company. Follow these steps:
- Go to Yahoo Finance Website: https://finance.yahoo.com/
- Search for a Symbol or Company — for example, TSLA for Tesla.
- Now, click on the “Statistics” tab.
- Go down to the “Share Statistics” section.
- In the “Shares Short” row, you will find the number of shares that have been sold as short.
- In the “Short % Float,” you will find the percentage of shares that are short.