Advance Block

finance a la shmoop what is short interest theory no this is not about

goldfish attention spans or shmoop writer attention spans either for that matter[Goldfish in ocean appear]

and yes that would be no this is not about goldfish attention spans but if we

know this is not our you can get the idea

all right short interest theory is yet another investing theory this one

basically says Zig one other's zag or rather the theory involves the float or

the trading totals of shares in a given company that is that if ten twenty maybe [Stock daily trading volume chart appears]

thirty percent of the stocks daily trading volume is held short with

investors betting the stock will go down well then it's going to gather your

interests if you're a institutional investor following this thing let's

think about this for a sec this means that if ten million shares trade a day

and four million are held short then some interesting things might just

happen let's think about this theory first this theory says that the stock [whatever.com stock price appears]

will likely go the other direction of where it's held short ya up you know

like the movie why would this be the case you got lots of people who are

smart shorting the stock betting it's gonna go down betting there's big

problems hmm okay so there's problem here when lots of smart people are

seeing the same thing no the same thing doesn't usually happen let's say you

have a stock at 40 bucks a share with a huge 35% short position on it and that [Stock with share price appears]

short position can be calculated as a percent of the float meaning the shares

that regularly trade every day or of the total shares outstanding why does it

matter well in some stocks where you have a hundred million shares

outstanding 60 million of those shares might be held by the founder and you

know 15 or 20 of his cronies and a couple of board members who are gonna

own it for decades they're never gonna sell so they don't trade in it so not a

hundred million shares trade regularly it's more like only 40 million shares

trade regularly so a thirty five percent short position on that company might

only refer to the float of 40 million shares in which case something like in

twelve thirteen million in change are short on it got it alright so in our [Investors appear]

example here let's say investors probably shorted that stock that's now

at 40 bucks they shorted it at 50 and some at 30 and some at 60 and some at 20

right like it's a volatile stock and they all sold a short thinking was gonna [Investors with different share price appear]

be worth eight bucks at some point so you look at a short position in a stock

and it's likely that not all investors shorted it exactly the same price

certainly not worth trading today at these forty bucks so now the stock does

miss a quarter and it goes down three dollars on the news to 37 well there are

probably a whole lot of investors who did short at 40 and are happy to make

their quick three bucks buy the stock back and close out their short position

with the brokerage they make $3 and move on all right well others who shorted at [Investor scratching head]

20 only to see the stock double like wiping them out like they lose a lot of

money when the stock goes up 20 bucks when they were at 20 betting it was

going to 8 or whatever well they want to stop the pain so they just buy out their

short position at 37 here taking $17 of pain in the process and moving on all

right and that was pain like a lot of pain those seventeen dollars of loss [Man screams in pain]

like 50 shades of a broker yeah where the safe word is neutralized and then

there are still others who shorted the stock heroically at 60 bucks a share who

are now happy to get off the million dollar ride and convert meaning they'll [Rollercoaster appears]

buy back their stock at 37 dollars here in making 23 bucks a share in profit and

move on well what does all this mean all this conversion of a short position to

ending the short or unwinding it buying the stock long handing all the shares

back to the brokerage and having no exposure to this stock anymore what does

all this mean well with a ton of quote fuel unquote left in the ownership [Fuel gauge appears]

position and likely with days and days of short position out there like days

and days of trading like even if you unwound 5% of the total flowed every day [Calendar pages flick over]

would take you days and days to fully unwind a short position until there was

zero percent short on that stock eventually you have to convert those

short positions to long positions or at least by long positions against them to

neutralize your exposure to the short so the stock essentially has time on its

side as odd as that sounds and brokerages love doing stuff like this

because they charge the people who short the stock a fortune to rent the stock to

short it's called the borrow and it's a nice profit

Center for brokerages who trade in all that got it okay so times on their side [Clock ticking forward]

because whichever way the stock moves it will make the load of investors nervous

and they will likely start buying the shares long to close out their short

positions and remember that when investors short a stock they have to pay

this borrow on the interest as long as they're short that stock so even if they

buy them and they're still short they have to then give both the long and the [Investors cash transfers to brokerage]

short back to the brokerage to neutralize the position there is no good

strategy to short and hold the stock for ten years unless you were at GE a decade

ago maybe but even then the borrow would probably kill you all right moving on

then there's always the specter of Google coming along and paying $60 a [Google HQ appear]

share for our stock that wheedle down to 37 dollars a share and then you're

really wiped out because if you shorted it at 20 and you never covered and

Google pay sixty for it you've lost $40 a share on your short position and

that's a problem so yeah that's the short interest Theory when there's lots

of shares short on a stock it actually tends to go the other way I mean it goes

up not down because there's so many short people nervous Nellie's out there [Girl biting her nails]

who know they have to cover their short at some point and there's also a short

attention span theory which is the theory that you stop watching this video [Woman whistling and walks away from computer]

45 seconds ago didn't you yeah all right we knew it