You will be able to read short interest and borrow data as information, even if you never short a stock.
Marcus will probably never short a stock. He still checks short interest on his US chip designer every few weeks, the way a careful driver glances at the fuel gauge of the car in front. Short sellers are the one group of investors paid to find what's wrong with a company, they put money behind their view, and the data on what they're doing is public. You don't have to agree with them. You should know when they're circling.
A short sale is selling shares you don't own. You borrow them, usually through your broker from an institution that lends out its holdings, sell them at today's price, and promise to return the same number of shares later. To close the position you buy the shares back and return them. If the price fell, you keep the difference. If it rose, you pay it.
Here are made-up figures. A trader borrows and sells 100 shares at US$50, receiving US$5,000. If the price falls to US$30, she buys back for US$3,000 and keeps US$2,000 before costs. If it rises to US$80, buying back costs US$8,000 and she loses US$3,000. At US$150 the loss is US$10,000, twice what she received.
That's the asymmetry. A buyer can lose at most what they paid, because a price can't fall below zero. A short seller's loss has no ceiling, because a price can keep rising. Short sellers also pay any dividends the company declares while they're short, and the lender can recall the shares at any time, which forces a buyback when it suits the lender rather than the short seller.
Borrowed shares aren't free. The short seller pays a borrow fee, quoted as a yearly percentage of the position's value.
For most large, widely held companies, plenty of shares are available to lend and the fee is small, often a fraction of a percent a year. When many traders want to short the same stock and few shares are available, the fee rises, sometimes to tens of percent a year. On the US$5,000 position above, a 2% fee costs US$100 a year. A 50% fee costs US$2,500 a year, which means the short seller needs the price to fall a long way, and soon, just to break even.
So a high borrow fee tells you two things: demand to short is strong, and the people shorting are confident enough to pay heavily for it. Some brokers show borrow availability and indicative fees on their platforms. Data providers also sell it.
Short interest is the number of shares sold short and not yet bought back. In the US, short interest for exchange-listed stocks is collected and published twice a month, and finance websites and broker platforms show it, usually alongside two derived figures.
The first is short interest as a percentage of free float. If 30 million shares are short and the float is 200 million, short interest is 15% of float. For most large US companies the figure is low single digits. Double digits stands out.
The second is days to cover: short interest divided by average daily volume. With 30 million shares short and 3 million traded a day, days to cover is 10. That's roughly how many days of normal trading it would take for every short seller to buy back.
For SGX stocks, short-selling data is thinner and less often quoted on retail platforms. The ideas still apply, but you'll do most of this reading on US holdings.
High short interest isn't proof of anything. It's a prompt to check a few things yourself, and the common reasons fall into a short list.
Doubts about the accounts are one. Short sellers often focus on companies where profit grows much faster than cash flow, receivables pile up, or acquisitions make the figures hard to compare. Some publish research reports setting out their case. Module 7 teaches the checks they use, in lesson 7.5, Earnings quality: accruals, cash conversion and red-flag scores.
Expected bad news is another: a product facing competition, a customer about to leave, a debt maturity the company may struggle to refinance. Hedging is a third. Some short interest belongs to funds that own a competitor or a convertible bond and short the stock to balance that risk, with no view on whether it will fall. That's why short interest on its own can mislead.
When Marcus saw short interest on his chip designer rise from 2% to 6% of float over a few months, made-up figures, he didn't sell. He read the latest results announcement looking for what might worry a sceptic, and found that inventory had grown much faster than sales for two quarters. That was worth a closer look at the next results, and he wrote it down as something to check.
When a heavily shorted stock rises sharply, short sellers face mounting losses, and some are forced to buy back by their brokers or their own limits. Their buying pushes the price higher, which forces more buying. That's a short squeeze. In January 2021, GameStop shares rose many times over in a few weeks as retail buyers piled in and short sellers rushed to cover.
Squeezes can look like an opportunity. They're risk. Prices in a squeeze reflect forced buying, not the value of the business, and they can fall as quickly as they rose once the buying stops. If you own a heavily shorted stock, a squeeze is a chance to check your thesis, not proof that the short sellers were wrong. If you're tempted to buy because a squeeze is under way, you're betting on other people's forced trades, which this course doesn't teach.
Look up short interest for one US stock you own or follow on your broker's platform or a finance website, note the percentage of float and days to cover, and decide what you'd check next.
Look up short interest for one US stock you own or follow and write what it suggests and what you would check next.
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